Term
|
Definition
declines if the value of the fund's assets are reduced |
|
|
Term
If the shares of a closed-end investment company sell for a discount |
|
Definition
the net assets exceed the price of the shares |
|
|
Term
The shares of a load fund |
|
Definition
sell for a premium over the fund's net asset value |
|
|
Term
The portfolios of balanced funds |
|
Definition
|
|
Term
Realized returns by mutual funds |
|
Definition
are generally distributed |
|
|
Term
Costs associated with investing in mutual funds include |
|
Definition
management fees and load charges
|
|
|
Term
The net asset value of a mutual fund's share increases with |
|
Definition
an increase in security prices |
|
|
Term
An index fund limits its portfolio to |
|
Definition
stocks included in an aggregate measure of the stock market |
|
|
Term
|
Definition
- does not have a fixed number of shares
- has potential diversification
- have not tended to outperform the market consistently
- sells for their net asset value
- cannot sell for a discount from their net asset value
- does not reduce systematic and unsystematic risk
- distribute earned income and realized capital gains
- investor sells the shares back to the company to remove funds
|
|
|
Term
|
The shares of closed-end investment companies |
|
Definition
- are bought and sold in secondary markets like the NYSE
- do not sell for their net asset value
- can be acquired by buying shares on a secondary market from a broker, market maker, or other investor
- generally do not sell for a premium and often sell for a discount from their net asset value |
|
|
Term
An exchange-traded fund's shares |
|
Definition
| are bought and sold in the secondary markets such as the NYSE |
|
|
Term
|
The sales commission associated with purchasing mutual funds is called a |
|
Definition
|
|
Term
A mutal fund in which shares are sold without a commission or sales charge
|
|
Definition
"no load fund"
The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party
|
|
|
Term
|
An exchange-traded fund's portfolio seeks |
|
Definition
| to duplicate the performance of a market index |
|
|
Term
| The managers of mutual funds |
|
Definition
| donot tend to outperform the market consistently |
|
|
Term
|
Definition
- a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions
- does not seeks to outperform a specific stock index like the S&P 500
|
|
|
Term
|
Definition
- may be used as indicators of risk
- with 1.2 implies that a return of 1% on the market will cause the return on this stock to be 1.2% and the stock is more risky than the market
- measures investment risk in relative to the market
-An aggressive investor will tend to prefer stocks with high betas during rising markets
|
|
|
Term
|
Definition
- The larger the standard deviation of an investment's return, the larger is the investment's risk
- The risk associated with dispersion around an expected return
|
|
|
Term
|
Definition
- not reduced through portfolio diversification
|
|
|
Term
|
Definition
| - reduces unsystematic risk |
|
|
Term
|
For a security to help significantly diversify a portfolio, the asset
|
|
Definition
|
should have a return that is negatively correlated with the return on other securities in the portfolio
|
|
|
Term
|
According to CAPM, the required rate of return excludes
|
|
Definition
|
the stock's standard deviation
|
|
|
Term
|
If the standard deviations (total risk) for return on stock A and stock B are 25% and 30% respectively and the betas (systematic risk) for two stocks are 1.5 and 0.9 |
|
Definition
|
Stock A has a lower total risk than Stock B
|
|
Stock A has a higher systematic risk than Stock B
|
|
|
|
Term
|
Definition
A portfolio consisting of securities that are highly uncorrolated is well diversified |
|
|
Term
|
Definition
- refers to the earning of interest on interest.
- method used to determine the future value of money invested today.
- The more frequently interest is compounded, the larger will be the final or terminal amount |
|
|
Term
|
Definition
| - is the method to determine the present value of money to be received in the future. |
|
|
Term
|
Definition
| the payments are made at the end of the year |
|
|
Term
|
Definition
- is larger the shorter the time period
- is larger the smaller the interest rate |
|
|
Term
|
Definition
- increases with higher interest rates
- increases with longer periods of time |
|
|
Term
| The owners of a corporation |
|
Definition
elect the board of director
are NOT obligated to pay cash dividends if they generate earnings |
|
|
Term
| Cumulative voting concentrates voting power |
|
Definition
| in the hands of a minority of corporate voters. |
|
|
Term
|
Definition
| mean that current stockholders have the right to maintain their proportionate ownership before new shares may be sold to the general public. |
|
|
Term
|
Definition
- reduces the firm's assets
- causes assets and equity to decrease
- tend to pay a regular quarterly cash
- come at the expense of retained earnings |
|
|
Term
|
Definition
-has impact on a firm's liabilities or the price of its stock.
decreases retained earning
- DO NOT increase the wealth of stockholders who receive additional shares
- decreases the firm's retained earnings |
|
|
Term
| If a stock is selling for $90 and is split 3 for 1 |
|
Definition
| the new price of the stock should be $30. |
|
|
Term
| If a firm does not pay cash dividends |
|
Definition
- it may reinvest the earnings and grow
- it may result in greater growth and higher prices
- it may finance growth and increase the value of their shares |
|
|
Term
| Stockholders who seek to defer taxes |
|
Definition
| prefer capital gains to dividends. |
|
|
Term
| Most publicly held American firms that pay dividends |
|
Definition
| tend to pay a regular quarterly cash dividend. |
|
|
Term
| A reserve split (e.g., 1 for 10) |
|
Definition
| should raise the per share price of a stock |
|
|
Term
|
Definition
| total equity and total assets |
|
|
Term
|
Definition
| The document stating the terms of a bond |
|
|
Term
| The highest credit rating |
|
Definition
|
|
Term
| Equipment trust certificates issued by a firm |
|
Definition
| should be safer than its debentures |
|
|
Term
| A periodic payment to retire a debt |
|
Definition
| is illustrative of a sinking fund. |
|
|
Term
|
Definition
- may be repurchased by the firm prior to maturity.
- all debentures are bonds but not all bonds are debentures.
- secured by collateral tend to be safer than other bonds issued by the firm |
|
|
Term
|
Definition
| permits the firm to retire the bonds prior to maturity |
|
|
Term
|
Definition
| may NOT anticipate that a bond will be called if interest rates have risen |
|
|
Term
|
Definition
| - may retire bonds by purchasing the debt in the secondary markets |
|
|
Term
| The interest paid by federal government bonds |
|
Definition
| - IS subject to federal income |
|
|
Term
| The interest paid by municipal bonds |
|
Definition
| is NOT subject to federal income taxation. |
|
|
Term
|
Definition
| - are short-term debt issued by the federal government |
|
|
Term
| If a company defaults on its bonds |
|
Definition
| - interest continues to accrue but may not be paid |
|
|
Term
|
Definition
|
|
Term
| If a company fails to meet the terms of the indenture, it is |
|
Definition
|
|
Term
| Debt instruments subject their owners to risk from |
|
Definition
- loss of purchasing power
- default |
|
|
Term
|
Definition
| - supported by collateral |
|
|
Term
| bondholders may lose their investments |
|
Definition
| - If a company enters bankruptcy court |
|
|
Term
| reduces the investor's risk associated with investing in bonds |
|
Definition
| a variable interest rate and sinking fund |
|
|
Term
| Bonds may be retired prior to maturity by |
|
Definition
- repurchases
- a sinking fund
- a call feature |
|
|
Term
| decrease in interest rates |
|
Definition
| increases the net present value of an investment |
|
|
Term
| will increase an investment's net present value |
|
Definition
A decrease in the cost of an investment
A decrease in investors' required rate of return |
|
|
Term
| The internal rate of return |
|
Definition
- equates the present value of an investment's cash inflows and its cost (outflows).
- method of capital budgeting permits a ranking of investment proposals.
- is independent of the firm's cost of capital.
-will be higher if the cost of the investment is lower |
|
|
Term
| A firm should make the investment if |
|
Definition
| If the cost of capital exceeds the internal rate of return |
|
|
Term
| If an investment requires the firm to carry more current assets |
|
Definition
| it decreases the investment's net present value. |
|
|
Term
| For a given set of cash inflows, the more an investment costs |
|
Definition
| the smaller will be its NPV |
|
|
Term
| A major difference between the net present value and internal rate of return is the |
|
Definition
|
|
Term
| If two investments are mutually exclusive |
|
Definition
| the firm cannot make both investments. |
|
|
Term
|
Definition
compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account
- can be negative
-will be larger the cost of the investment is lower |
|
|
Term
| A high cost of capital favors |
|
Definition
| investments with large initial cash inflows |
|
|
Term
| An increase in interest rates (cost of capital) |
|
Definition
- decreases the net present value of an investment
- increases an investment's internal rate of return.
- comes when the probability of an investment's cash inflows is decreased
- decrease an investment's net present value |
|
|
Term
| An increase in investors' required return |
|
Definition
| increases an investment's internal rate of return |
|
|
Term
| An increase in the cost of an investment |
|
Definition
| increases the investment's cash flows |
|
|
Term
| An increase in an investment's cash inflows |
|
Definition
| has an effect on the net present value of an investment |
|
|
Term
| Analyzing an investment from a stand-alone perspective |
|
Definition
| avoids considering portfolio effects |
|
|
Term
| For an investment to diversify a portfolio, |
|
Definition
| -its returns must be NEGATIVELY correlated with other returns. |
|
|
Term
| Low correlation among cash inflows is associated with |
|
Definition
| higher net present values. |
|
|
Term
| A higher standard deviation for an investment's cash inflows |
|
Definition
| is associated with greater risk |
|
|
Term
| larger beta coefficients. |
|
Definition
|
|
Term
| The internal rate of return will be higher if |
|
Definition
| the cost of the investment is lower |
|
|
Term
| The internal rate of return and net present value methods of capital budgeting assume the cash flows are reinvested at |
|
Definition
| the cost of capital for NPV and the internal rate of return for IRR |
|
|
Term
| NPV may be preferred to IRR because |
|
Definition
| NPV makes the more conservative assumption concerning reinvestment |
|
|
Term
| If the net present value is positive if |
|
Definition
- the internal rate of return exceeds the firm's cost of capital
- the present value of cash inflows exceeds the present cost of an investment |
|
|
Term
| If an investment's net present value is negative |
|
Definition
- the firm should not make the investment
- the costs exceed the present value of the cash inflows |
|
|
Term
| If the net present value of two mutually exclusive investments is positive, the firm should |
|
Definition
| - make the investment with the higher net present value |
|
|
Term
| If the internal rate of return of two mutually exclusive investments is less than the firm's cost of capital, the firm should make |
|
Definition
|
|
Term
| According to the risk-adjusted net present value, an investment should be made if |
|
Definition
| the net present value is positive |
|
|
Term
| If the risk-adjusted net present value is positive |
|
Definition
- the internal rate of return exceeds the firm's cost of capital
- the present value of cash inflows exceeds the present cost of an investment |
|
|
Term
| The negative correlation between an investment's return and the firm's other investments suggests |
|
Definition
| portfolio effects may exist |
|
|
Term
| Small standard deviations for cash inflows |
|
Definition
|
|
