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Personal Finance Chapter 11
N/A
29
Finance
Undergraduate 1
12/11/2011

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Term
Investment
Definition
An asset that generates a return. For example, stocks pay dividends and bonds pay interest, so these are considered investments
Term
Income Return
Definition
Investment return received directly from the company or organization in which you've invested, usually in the form of dividends or interest payments
Term
Speculation
Definition
An asset whose value depends solely on supply and demand, as opposed to being based on the return that it generates. For example, gold coins and baseball cards are worth more in the future only if someone is willing to pay more for them
Term
Derivative Securities
Definition
Securities whose value is derived from the value of other assets
Term
Option
Definition
A security that gives its owner the right to buy or sell an asset - generally common stock - at a specified price over a specified period
Term
Maturity Date
Definition
The date at which the borrower must repay the loan or borrowed funds
Term
Par Value or Principal
Definition
The stated amount on the face of a bond, which the firm is to repay at the maturity date
Term
Coupon Interest Rate
Definition
The interest to be paid annually on a bond as a percentage of par value, which is specified in the contractual agreement
Term
Stock
Definition
A fractional ownership in a corporation
Term
Dividend
Definition
A payment by a corporation to its shareholders
Term
Capital Gain or Loss
Definition
The gain (or loss) on the sale of a capital asset. For example, any return (or loss) from the appreciation (or drop in value) in value of a share of stock would be considered a capital gain (or loss).
 
Term
Nominal (or Quoted) Rate of Return
Definition
The rate of return earned on an investment, unadjusted for lost purchasing power
Term
Real Rate of Return
Definition
The current or nominal rate of return minus the inflation rate
Term
Interest Rate Risk
Definition
The risk of fluctuation is security prices due to changes in the market interest rate
Term
Inflation Risk
Definition
The risk that rising prices will eat away the purchasing power of your money, and that changes in the anticipated level of inflation will result in interest rate changes, whcih will in turn cause security price fluctuations
Term
Business Risk
Definition
The risk of fluctuations in security prices resulting from good or bad management decisions, or how well or poorly the firm's products are doing in the marketplace
Term
Financial Risk
Definition
The risk associated with a company's use of debt. If a company takes on too much debt and can't meet its obligations, investors risk the company defaulting or dropping in stock value
Term
Liquidity Risk
Definition
Risk associated with the inability to liquidate a security quickly and at a fair market price
Term
Market Risk
Definition
Risk associated with overall market movements
Term
Political and Regulatory Risk
Definition
Risk resulting from unanticipated changes in the tax or legal environment
Term
Exchange Rate Risk
Definition
The risk of fluctuations in security prices from the variability in earnings resulting from changes in exchange rates
Term
Call Risk
Definition
The risk to bondholders that a bond may be called away from them before maturity
Term
Calling a Bond
Definition
The redeeming of a bond before its scheduled maturity. Many bonds are callable
Term
Diversification
Definition
The elimination of risk by investing in different assets. It works by allowing the extreme good and bad returns to cancel each other out. The result is that total variability or risk is reduced without affecting expected return
Term
Portfolio
Definition
A group of investments held by an individual
Term
Systematic or Market-Related or Non-diversifiable Risk
Definition
that portion of a security's risk or variability that can't be eliminated through investor diversification. This type of variability or risk results from factors that affect all securities
Term
Unsystematic or Firm Specific or Company-Unique Risk or Diversifiable Risk
Definition
Risk or variability that can be eliminated through investor diversification. Unsystematic risk results from factors that are unique to a particular firm
Term
Asset Allocation
Definition
An attempt to ensure that the investor's strategy reflects his or her investment time horizon and is well diversified, generally with assets in several different classes of investments, such as domestic common stocks, international common stocks, and bonds
Term
Efficient Market
Definition
A market in which all relevant information about the stock is reflected in the stock price
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