Accounting
The system of recording, reporting, and summarizing past financial information and transactions.
Accounts Receivable Turnover (AR Turnover)
An activity ratio found by credit sales divided by accounts receivable.
Activity Ratios
A category of ratios that measure how well a company uses its assets to generate sales or cash, showing the firm's operational efficiency and profitability.
Additional Funds Needed (AFN)
Another name for the discretionary financing needed or external financing needed. It represents the additional financing needed given a firm's expectations for future growth.
Affirmative Covenants
A bond covenant that describes things the company pledges itself to do in order to protect bondholders.
Agency Costs
Costs that are incurred when management does not act in the best interest of shareholders.
Agency Problem
When the agent (the management) does not act in the best interest of the principal (the owners).
Aggressive Assets
Companies or securities with beta greater than 1.
Annual Percentage Rate
The annual interest rate that is charged for borrowing money or that is earned through investment.
Annuity
A stream of cash flows of an equal amount paid every consecutive period.
Annuity Due
A series of equal payments made at the beginning of consecutive periods.
Asset Pricing
The process of valuing assets.
Auction Market
A secondary market with a physical location and where prices are determined by investors' willingness to pay.
Average Collection Period (ACP)
An activity ratio found by the number of days in a year (365) divided by AR turnover.
Balance Sheet Forecasting
Using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances.
Banks and Credit Unions
Receive deposits and extend loans to individuals and businesses.
Benchmarking
The process of completing a financial analysis to compare a firm's financial performance to that of other similar firms.
Beta
A variable that describes how the price of a security varies with the market.
Bid-ask Spread
The difference between the bid and ask prices that compensate the specialist for the risk that he or she bears for willingness to provide liquidity.
Board of Directors
A group of people who jointly supervise the activities of an organization.
Bond Indenture
A legal contract that governs the relationship between a firm and its bondholders.
Bondholders
A person who loans a corporation money by buying debt securities.
Business Finance
An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources.
Cannibalization
The reduction in sales of a company's own products due to introduction of another similar product.
Capital
A financial asset that can be used by a firm or individual. Examples of capital may be machinery or cash held by a firm.
Capital Asset Pricing Model (CAPM)
A model used to determine the risk-return relationship for an asset.
Capital Budgeting
The process of evaluation and planning for purchases of long-term assets.
Capital Budgeting Criteria
Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment.
Capital Investment
The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.
Capital Markets
A type of financial market used for long-term assets that are held for greater than one year.
Capital Structure
The mixture of debt and equity used to finance a firm.
Capital-constrained Environment
When a limited amount of funds are available.
Cash Budgets
A plan for controlling cash inflows and outflows business to balance income with expenditures.
Cash Management
Managing the day-to-day finance operations of a firm.
Central Banks
Ensure that a nation's economy remains healthy by controlling the amount of money circulating in the economy.
Common Stock
A type of stock that represents equity in a firm and confers the right to vote at shareholder meetings.
Compounding
Finding a future value given a present value.
Compounding Interest
The interest on the principal plus the interest on earned interest.
Corporate Bonds
A debt instrument that is issued by a corporation in order to raise capital.
Corporate Governance
The system of rules, practices, and processes by which a firm is directed and controlled.
Correlation
The measure of the relationship between two variables that move in relation to each other.
Cost of Capital
The cost to a firm to use an investor's capital; see interest rate.
Coupon Rate
The stated interest rate of a bond; also known as coupon yield.
Coupon Yield
The stated interest rate of a bond; also known as coupon rate.
Covenants
Statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders.
Credit Analysts
A commercial bank position with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients.
Cross-sectional Analysis
Comparing a firm's financial ratios to other firms' ratios or industry averages.
Cumulative
A feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay that dividend sometime in the future before paying any common dividends.
Current Market Value
What someone would pay right now for an asset.
Current Ratio
A liquidity ratio found by current assets divided by current liabilities.
Dealer Market
A secondary market made up of multiple dealers that hold an inventory of securities and quote prices.
Debt Ratio
A financing ratio found by total liabilities divided by total assets.
Debt-to-equity Ratio
A financing ratios found by total liabilities divided by total equity.
Default
Failure to meet a debt obligation.
Default Risk
The probability of a loss resulting from a borrower's failure to repay a contractual obligation; also called credit risk.
Defensive Assets
Companies or securities with beta less than 1.
Discount Bond
A bond whose price is below its par value.
Discount Rate
The name for interest rate when used in time value of money calculations.
Discounting
Finding a present value given a future value.
Discretionary Accounts
Accounts that do not vary automatically with sales but are left to the discretion of management.
Discretionary Financing Needed (DFN)
The additional financing needed given a firm's expectations for future growth.
Diversification
The process of "spreading" your money over many different assets.
Dividend Discount Model
A model used to evaluate common stock that calculates the value of a share of common stock today by taking the present value of future dividend cash flows.
Dividends in Arrears
A feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders.
DuPont Framework
An expanded formula of the return of equity, net margin times total asset turnover times leverage multiplier, which represent the components of profitability, activity (efficiency), and financing.
Efficient market
A market in which prices fully reflect all the available information about a specific security.
Estates
Everything that a person owns or controls, especially at death.
Ethical Dilemma
An issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint.
Ethics
Following accepted standards of moral conduct.
Expected Return
A hypothesized estimate of future prices or returns under different scenarios based on expectational data.
External Financing Needed (EFN)
Another name for the discretionary financing needed or additional funds needed. It represents the additional financing needed given a firm's expectations for future growth.
Face Value
The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.
Finance
The study of managing and allocating funds at the personal or business level.
Financial Institutions
An area of finance that includes firms or organizations that exist to accept a wide variety of deposits, to offer investment products to individuals and businesses, to provide loans, or to broker financial transactions.
Financial Managers
A person who makes strategic financial decisions in a corporation.
Financial Policy Implementation
Incorporating new finance ideas within a firm.
Financial Risk
Increased volatility in earnings as a result of using debt.
Firm-specific Risk
Risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk.
Fisher Effect
An economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate.
Fixed Asset Turnover (FAT)
An activity ratio found by sales divided by fixed assets.
Fixed Expenditures
An expense that you do not have direct control over and that remains constant from period to period.
Fixed-income Securities
Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year.
Future Value
The worth of cash flows in terms of the dollar amount in the relative future.
Gordon Growth Model
A formula used to value common stock based on the assumptions that dividends are paid every year and grow at constant rate forever.
Gross Margin
A profitability ratio found by gross profit divided by sales.
Harvest
Generating cash or stock from the sales or IPO of companies in the portfolio of investments.
Holding Period Return
The return over the entire period that an investor owns a financial security.
Hurdle Rate
The required rate of return that a company expects to earn in order to consider a project.
Hybrid Security
A security that has some elements that resemble equity and others that resemble debt.
Idiosyncratic Risk
Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or nonsystematic risk.
Incremental Cash Flows
Cash flows that result from accepting a project.
Inflation
The rate at which the average price level of a basket of chosen goods and services in an economy increases over a period of time.
Initial Public Offering (IPO)
When a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company.
Insurance Companies
Charge premiums to invest in bonds and stocks to pay claims.
Interest Rate
The percentage of the principal that a lender charges a borrower for the use of assets.
Interest Rate Risk
The probability that changes in interest rates will impact the value of a bond.
Internal Rate of Return (IRR)
The rate of return that a firm earns on its capital projects.
Intrinsic Value
The value of an asset as determined through fundamental analysis without referring to the asset's market value.
Inventory Turnover
An activity ratio found by COGS divided by inventory.
Investment Bank
A financial intermediary that offers complex financial transactions such as underwriting, facilitating mergers, and buying and selling financial securities on behalf of large institutions.
Investments
An area of finance that involves deciding which assets to invest in to create wealth in the future.
Legal
Following the laws and rules set by an authority.
Leverage
Another name for debt or liability.
Leverage Ratios
A category of ratios that consider how a firm is financed.
Liquid Asset
An asset that can be converted into cash quickly without the loss of significant value.
Liquidity
The ability to turn financial securities into cash easily without losing significant value.
Liquidity Ratios
A category of ratios that measure a firm's ability to meet short-term obligations.
Market Capitalization
The current market value of a publicly traded company's total outstanding shares, indicating the size of a company.
Market Ratios
A category of ratios that are used to evaluate the current share price of a public firm's stock.
Market Risk
Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or nondiversifiable risk.
Market-to-book Ratio (M/B Ratio)
A market ratio found by market value of equity divided by book value of equity.
Marketing
The business function responsible for generating sales.
Maturity Date
The date at which a bond expires.
Money Market
A type of financial market used for short-term assets that are held for less than one year.
Morals
Following one's standards of right and wrong behavior.
Mutual Fund
An investment company that continually offers investments and buys financial securities and instruments on behalf of investors.
Mutually Exclusive
When two or more events do not coincide.
NASDAQ
A computer network where stocks are bought and sold. It is the second-largest stock exchange in the world. Typically, technology-related companies will go public through this exchange.
Negative Covenants
A bond covenant that describes things the company pledges itself not to do in order to protect bondholders.
Net Margin
The percentage of sales remaining after all costs have been deducted from a company's total sales. Also known as net profit margin; indicates the profit earned by the firm.
New York Stock Exchange (NYSE)
A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world.
Nominal Rate
The rate at which invested money grows for a certain period of time.
Nondiversifiable Risk
Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or systematic risk.
Nonsystematic Risk
Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or idiosyncratic risk.
Operating Income Return On Investment (OIROI)
An activity ratio found by operating income divided by total assets.
Operating Margin
A profitability ratio found by EBIT profit divided by sales.
Opportunity Cost
The loss of potential gain from other alternatives when one alternative is chosen.
Ordinary Annuity
A series of equal payments made at the end of consecutive periods over a fixed length of time.
Par Bond
A bond whose price is exactly equal to its par value.
Par Value
The sum of money that a corporation promises to pay at the expiration of a bond; also called face value.
Payout Ratio
The percent of net income distributed to the shareholders.
Pension Fund
A financial institution that specializes in managing and administering retirement funds.
Perpetuity
A constant stream of identical cash flows that continues forever.
Perpetuity Model
A formula used to value preferred stock that is based on the calculation of a perpetuity.
Personal Bankers
A commercial bank position with the responsibility to find and attract new clients.
Plowback Ratio
The percent of net income retained in the firm; also called the retention ratio.
Preferred Stock
A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders.
Premium Bond
A bond whose price is above its par value.
Present Value
The worth of cash flows in terms of the dollar amount in the relative past.
Price Risk
The potential for the decline in the price of a financial security or an asset relative to the market.
Price-to-earnings Ratio (P/E Ratio)
A market ratio found by price per share divided by earnings per share.
Primary Market
The financial market where securities (stocks and/or bonds) are first sold.
Private Equity
A financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors and wealthy individuals.
Privately Held Companies
Firms that have not issued shares to the public where the ownership rights are privately held.
Pro Forma Statements
A financial statement that projects an estimate for future periods "as if" sales grew as predicted.
Profit Forecasting
The projection of future earnings after all projected costs are subtracted from projected sales.
Profitability Index (PI)
The ratio of payoff to investment for a proposed project.
Profitability Ratios
A category of ratios that are commonly used to directly judge how well management is doing as they strive to maximize owner wealth.
Publicly Traded Firms
Firms that have issued shares to the public.
Quick Ratio
A liquidity ratios found by current assets less inventory, divided by current liabilities; also called the acid-test ratio.
Real Rate
An interest rate that is adjusted to remove the effects of inflation.
Required Rate of Return
The minimum return or compensation an investor requires in order to invest; see interest rate.
Research and Development
The business function responsible for improving and developing services and products.
Retention Ratio
The percent of net income retained in the firm; also called the plowback ratio.
Return
The money gained or lost on an investment over a certain period of time.
Return On Assets (ROA)
A profitability ratio found by net income divided by total assets.
Return On Equity (ROE)
A profitability ratio found by net income divided by owners' equity.
Revenues
The top line of the income statement. The total amount of money a business brings in (before subtracting any costs).
Risk
The possibility that the realized or actual return will differ from the expected return.
Risk Avoidance
A way to manage risk by not performing an activity that may carry risk.
Risk Premium
The compensation for the amount of risk taken on by investors.
Risk Reduction
A series of techniques that help reduce the amount of risk a person is exposed to by taking a particular action.
Risk Retention
A decision to take responsibility for a particular risk.
Risk Separation
A risk management technique that involves dispersing assets geographically instead of concentrating them in one location.
Risk Transfer
A risk management technique that involves reducing the amount of risk you are exposed to by transferring that risk to another entity.
Risk-free Rate
The rate of return on an investment with no risk.
Sales
The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).
Seasonal Firms
Firms whose performance varies according to the season.
Secondary Market
The financial market where securities are traded after the initial issuance.
Securitization
The process of combining several types of contractual debt (such as mortgages) and reselling them as a package to investors.
Shareholders
A person who owns shares of a company's stock.
Simple Interest
The interest earned only on the principal.
Specialist
A market maker on the NYSE that holds an inventory of securities and acts as a liquidity provider to those that wish to buy and sell.
Spontaneous Accounts
Accounts that vary naturally with sales.
Stakeholder
Anyone who may be affected by actions taken or a decision made.
Standard Deviation
A measure of dispersion of possible outcomes about the mean.
Steady State Growth
The level of growth where four key financial ratios�profitability, asset utilization, leverage, and payout�are constant and where the firm does not need to issue any new equity to fund the growth.
Stock
A share of ownership in a company.
Sunk Costs
A cost that has already been incurred and cannot be recovered.
Sustainable Growth Rate (SGR)
The growth rate that allows a firm to maintain its present financial ratios without issuing new equity.
Syndicate
A group of intermediaries that is used to oversee the issuance of stocks and/or bonds.
Systematic Risk
Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or nondiversifiable risk.
Tax Strategies
Methods used to minimize the amount of taxes a business pays.
Teller
An entry-level commercial bank position with the reponsibility to interact with customers at the bank's front desk or drive-through window.
Time Value of Money (TVM)
The idea that money that is available at the present time is worth more than the same amount in the future.
Times Interest Earned (TIE)
A financing ratio found by EBIT divided by interest expenses.
Total Asset Turnover (TAT)
An activity ratio found by sales divided by total assets.
Treasury Bill
A bill issued by the U.S. government as a financial security with no interest and a maturity of less than one year; abbreviated T-bill.
Treasury Note
A note issued by the U.S. government as a financial security with a fixed interest rate and a short maturity between 1 and 10 years; abbreviated T-note.
Treasury Securities
A debt instrument (bond) that is issued by the United States government in order to raise capital.
Trend Analysis
Comparing a firm's ratios across time.
Trusts
An arrangement that allows a third party to hold assets on behalf of a beneficiary or beneficiaries.
U.S Securities and Exchange Commission (SEC)
An independent federal government agency that (1) protects investors, (2) maintains fair, orderly, and efficient markets, and (3) facilitates capital formation.
U.S Treasuries
Bonds, bills, and notes issued by the U.S. government; considered to be the highest-quality securities available.
Upside Potential
The unlimited earnings potential of equity ownership.
Utility
The total satisfaction received from consuming goods and services.
Variable Expenditures
An expense that you have direct control over and that can change from period to period.
Venture Capitalists (VCs)
Professional managers of investment capital that typically invest in very young new ventures.
Wills
A legal expression of an individual's wishes concerning the desposition of his or her property after death.
Yield to Maturity (YTM)
The rate of return that investors receive on a bond if they purchase a bond today at the market price and hold it until it matures; the required rate of return given the maturity and risk of the bond.