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Ask price

the price announced by the seller at which he is willing to sell a stock

Annual Fee
a credit card.

An amount that credit card companies can charge for the use of

Annual Percentage Rate (APR)


Shows how much credit costs you on a
yearly basis, expressed as a percentage.

Asset Anything of value that a business owns, such as cash, equipment, or a


building.
Balance sheet
A report of the final balance of all assets, liabilities, and
owner's capital at the end of an accounting period.

Break-even point
The point at which the money from product sales equals
the costs of making and distributing the product.
Budget
A formal, written statement of expected revenue and expected
revenue and expenses for a future period.

Bank a financial institution that accepts deposits and channels the money into
lending activities

Bank Reserves
Federal Reserve

the currency banks hold in their vaults plus their deposits at the

Blue Chip Stocks stocks of large, well-established corporations with a solid record
of profitability

Board of Governors
Reserve System

the seven-member board that oversees the Federal

Bond a certificate of debt (usually interest-bearing or discounted) that is issued by


a government or corporation in order to raise money

bearer form
the form of bond issue in which the bond is issued without
record of the owners name; payment is made to whomever holds the bond

bid-ask spread

the difference between the bid price and the asked price

Bid price
stock

price announced by the buyer at which he is willing to purchase a

Bond ratings measure default risk


Capital
The buildings, equipment, tools, and other goods needed to
produce a product or the money used to buy these items.
call premium
bond

the amount by which the call price exceeds the par value of the

call protected bond

a bond that currently cannot be redeemed by the issuer

Call provision
An agreement giving the corporation the option to repurchase
the bond at a specific price prior to maturity

Capital Gains Yield

g - dividend growth rate

clean price the price of a bond net of accreued interest

Collateral

any asset pledged as security for debt payment.

Capital Gain
the difference between a higher selling price and a lower
purchase price, resulting in a financial gain for the seller

Capital Loss
Loss from the sale of an asset. (Capital loss can result when
stock is sold for a lower price than was paid for it).
Credit
An arrangement to receive cash, goods, or services now and
pay for them in the future.

call premium
bond

the amount by which the call price exceeds the par value of the

call protected bond

a bond that currently cannot be redeemed by the issuer

Call provision
An agreement giving the corporation the option to
repurchase the bond at a specific price prior to maturity

Capital Gains Yield

g - dividend growth rate

clean price the price of a bond net of accreued interest

Collateral

any asset pledged as security for debt payment.

Common Stock Rights

Voting Rights Proxy voting classes of stock

Companies Dont pay dividends...


business

Because they use their profits to grow their

Constant dividend growth


percent every period

firm will increase the dividend by a constant

constant dividend (Zero Growth)


firm will pay a constant dividend forever use
perpetuity formula P0=D1/R R=D1/P0

Constant growth model

price grows at the same rate as dividends

convertible bond
can be swapped for a fixed number of shares of stock
anytime before maturity at the bond holder's option

Coupon payment to coupon rate

divide coupon payment by 1000

Coupon rate

The annual coupon divided by the face value of the bond

Coupon Rate

= 7% $1000 X 7% = $70

Coupons

Stated interest payment made on a bond

current yield

a bonds annual coupon divided by its price

Central Banking System


A nation's central bank that is established to
regulate the money supply and oversee the nation's banks. In the United States the
Federal Reserve is the central bank.

Certificate of Deposit (CD)


a savings alternative in which money is left on
deposit for a stated period of time to earn a specific rate of return

Characteristics of Money
Durability, portability, divisibility, uniformity,
limited supply, and acceptability

Collateral

a security pledged for the repayment of a loan

Commodities Market
The market for the purchase and sale of commodity (a
basic product, usually, but not always, agricultural or mineral) futures, contracts for
the sale and delivery of commodities at some future time.

Compound Interest
interest already earned.

Interest earned on both the principal amount and any

Compounding
the accumulation of a sum of money in, say, a bank
account, where the interest earned remains in the account to earn additional
interest in the future

Contractionary Fiscal Policy a decrease in government purchases, increase in


net taxes, or some combination of the two aimed at reducing aggregate demand
enough to return the economy to potential output without worsening inflation; fiscal
policy used to close an expansionary gap

Contractionary Monetary Policy


the federal reserve's adjusting the money
supply to increase interest rates to reduce inflation

Credit
An arrangement to receive cash, goods, or services now and pay
for them in the future.

Credit Card A plastic card used to make purchases now and pay for them later.

Credit Rating
business

rating of the risk involved in lending to a specific person or

Credit Union
a nonprofit financial institution that is owned by its members
and organized for their benefit

Crowding-Out
occurs when a government deficit drives up the interest rate and
leads to reduced investment spending

Currency

the metal or paper medium of exchange that is presently used

Debit
A bookkeeping entry on the left side of an account. It records the
increase to an asset or an expense, OR the decrease of a liability or item of equity
or revenue.
Debenture An unsecured debt usually with a maturity of 10 years or more

Debt creditors do not have voting rights

Debt excess debt can lead to bankruptcy

Debt interest is considered a cost of doing business

Debt not an ownership interest

Debt an amount owed to a person or organization for funds borrowed

Debt creditors have legal recourse if interest payments missed

Debt Fully Tax deductible

default risk premium


the portion of a nominal interest rate or bond yield that
represents compensation for the possibility of default

Deferred Call Provision a call provision prohibiting the company from redeeming
the bond prior to a certain date

dirty price

the price of a bond including accrued interest

Discount Bond

Price below par

Discounting Future Amount the process of figuring out what that future value is
in present-day money

Dividends Payments by corporation to shareholders; made in either cash or stock;


Not tax deductible

Dividend Yield
current share price.

D1/P0 - stocks expected cash dividend divided by its

Debit Card a bank card that automatically deducts the amount of a purchase from
the checking account of the cardholder

Deflation

a contraction of economic activity resulting in a decline of prices

Demand

Deposit the money in checking accounts

Discount Rate
the rate of interest set by the Federal Reserve that member
banks are charged when they borrow money through the Federal Reserve System

Dividend
that part of the earnings of a corporation that is distributed to its
shareholders

Easy-Money Policy
monetary policy resulting in lower interest rates and
greater access to credit; associated with an expansion of the money supply

Equity

Amount of owners' or shareholders' portion of a business.

Equity

dividends are not considered a cost of doing business

Equity

common stockholders vote to elect board

Equity
is the ownership interest of shareholders in a coporation in the
form of common or preferred stock.

Equity

an all equity firm cannot go bankrupt

Equity

dividends are not a liability of firm until declared

Excess Reserves
requirement

reserves that banks hold over and above the legal

Expansionary Fiscal Policy


in taxes

An increase in government spending or a reduction

Expansionary Monetary Policy


the federal reserve's increasing the money
supply and decreasing interest rates to increase real GDP
Face Value The principal amount of the bond, repays at the end of the term of the
bond

Feature benefits bond holder

coupon rate will be lower

Feature benefits bond issuer

coupon rate will be higher

Fisher Effect
and inflation

The relationship between nominal returns, real returns

(1+R)=(1+r)X(1+h)

Floating rate bonds

coupon rates are adjustable

Fixed expense
rent or insurance.

a consistent and regular cost of doing business such as

Fair Credit Reporting Act


correct their credit information

federal law giving constumers right to veiw and


Federal Deposit Insurance Corporation (FDIC) A federal agency which insures
bank deposits, created by the Glass-Strengall Banking Reform Act of 1933.

Federal Reserve

the central bank of the United States

Finance Charge
card bill.

A fee for borrowing money, added to a monthly credit

Fiscal Policy
a government policy for dealing with the budget (especially with
taxation and borrowing)

Fractional Reserve Banking System


A banking system in which banks
keep less than 100 percent of deposits as reserves

Functions of Money Medium of exchange, unit of account, store of value


G increases

stock price increases

Higher Interest Rate risk

Long term bonds, lower coupon bonds

Income statement
A financial report of the revenue, expenses, and net
profit/loss for an accounting period.
Also know as the P&L statement for "profit and loss".
Initial Public Offering (IPO) the first time a company issues stock that may be
bought by the general public

Invoice
An itemized statement of money owed for goods shipped or
services rendered.
Interest

the price paid for the use of borrowed money

Interest Rate

the percentage of a sum of money charged for its use

if bid price raises...

the bid yield will decrease

If bond yield rises...

the bond price will decline

if coupon rate makes semiannual payments


multiply by two.

calculate coupon payment and

if YTM>coupon rate

par value (face value) >bond price (discount)

income bonds

coupon payments are dependent on company income

Indenture the written agreement between the corporation and the lender
detailing the terms of the debt issue

inflation premium
the portion of a nominal interest rate that represents
conpensation for expected future inflation

inside quotes

the highest bid and ask quotes

interest rate risk premium


interest rate risk

the compensation investors demand for bearing

Investment Return
The additional income earned from saving or investing
money, often expressed as an annual percentage of the amount invested.

Liability

A debt owed by a business.

Liquid Investment
s assets that flow easily since they can be converted into
other investments or cash without much time or difficulty

Liquidity
being in cash or easily convertible to cash, the ease with which an
asset can be converted into the economy's medium of exchange
liquidity premium
the portion of a nominal interest rate or bond yield that
represents compensation for lack of liquidity, or ability to sell bond quickly and
receive actual value

long term bonds vs short term bonds


rate risk

long term bonds have more interest

lower coupon bonds vs higher coupon bonds


interest rate risk

lower coupon bonds have more

Lower Grade bonds

higher rates of return

Lower interest rate risk

short term bonds, higher coupon rate bonds

Markup
ensure a profit.

The amount added to the cost of an item to cover expenses and

Monetary Policy
bank

the setting of the money supply by policymakers in the central

Money

the official currency issued by a government or national bank

Money Market Account


varies from month to month

is a savings account in which the interest rate

Money Market Mutual Fund (MMMF)


interest-bearing accounts offered by
investment companies, which pool depositor's funds for the purchase of short-term
securties. Depositors can write checks in minimum amounts or more against their
accounts

Money Supply

the total stock of money in the economy

maturity

date on which the principal amount of a bond is paid.

municipal securities
Net profit
revenue.

interest received is tax exempt at the federal level

The amount remaining after expenses are deducted from sales

NASDAQ
a nationwide electronic system that links dealers across the nation so
that they can buy and sell securities electronically

New York Stock Exchange (NYSE) The largest securities exchange in the United
States. After its 2007 merger with a large European exchange, it is formally known
as NYSE Euronext.

Open Market Operations


alter the supply of money

the buying and selling of government securities to

Return on investment (ROI)

The amount earned as a result of an investment.

Real Interest Rates


the interest rate that is adjusted by subtracting expected
changes in the price level (inflation) so that it more accurately reflects the true cost
of borrowing

Required Reserves
Reserves that a bank is legally required to hold, based on
its checking account deposits

Rule of 72 The number of years it takes for a certain amount to double in value is
equal to 72 divided by its annual rate of interest.

Stock
corporation

a certificate documenting the shareholder's ownership in the

Stock Market

A system for buying and selling shares of companies

Three Cs of Credit

Character Capacity Capital

Tight Money Policy


monetary policy resulting in higher interest rates and
restricted access to credit; associated with a contraction of the money supply

U.S. Savings Bonds


small denomination bonds that are issued by the federal
government at a discounted price and grow to full value over time.
Variable expenses
an occasional cost of doing business that varies in
amount from month to month.
Prestige pricing
a technique in which higher-than-average prices are used
to suggest status and prestige to the customer.

Price skimming
a technique of charging high prices on a new product to
recover costs, then dropped when the product is no longer unique.

Odd/even pricing A pricing technique in which odd-numbered prices are used to


suggest bargains, such as $19.99.

Discount pricing A technique that offers a percentage-off discount such as 25%


off

Bundle pricing
A technique in which several complimentary products are
sold for a single price, which is lower than the price would have been if each item
was bought separately.
liquidity premium
the portion of a nominal interest rate or bond yield that
represents compensation for lack of liquidity, or ability to sell bond quickly and
receive actual value

long term bonds vs short term bonds


rate risk

long term bonds have more interest

lower coupon bonds vs higher coupon bonds


interest rate risk

lower coupon bonds have more

Lower Grade bonds

higher rates of return

Lower interest rate risk

short term bonds, higher coupon rate bonds

maturity

date on which the principal amount of a bond is paid.

municipal securities

interest received is tax exempt at the federal level

Nominal rates

rates of return that have not been adjusted for inflation

Note an unsecured debt usually with a maturity of under 10 years

NYSE broker

PMT and FV Same Sign, PV opposite sign

positive covenant

specifies an action that the company agrees to do.

Preferred Stock

Dividend Payments are fixed

Preferred stock

does not generally carry voting rights

Preferred Stockholders
common stockholders

Paid after the bond holders but before the

Premium bond

Price above par

Presence of a Sinking Fund


stated maturity date

bond issuer can repay the principal earlier than the

protective covenant
a part of the indenture limiting certain actions that might
be taken during the term of the loan, usually to protect the lender

proxy
grant of authority by a shareholder allowing another individual to vot
that shareholder's shares

put bond
price

allows the holder to force the issuer to buy the bond back at a stated

Rate of Return
is the return obtained on an investment for a specific
period of time, which is expressed as a percentage

Real interest rates

rates of return that have been adjusted for inflation

registered form
the form of bond issue in which the registrar of the
company records ownership of each bond; payment is made directly to the owner of
record

Securities broker a person who brings buyers and sellers together

Securities Dealer
a person who maintains an inventory of stock and ready
to buy and sell that stock at any time

Seniority of a bond
seniority of a bond means that if there is a default, the
senior bond will get a preference over other bonds and creditors.

An account

managed by the bond trustee for early bond redemption

Supernormal Growth (non constant growth)


Dividend growth is not
consistent, but settles down to constant growth eventually

taxability premium
the portion of a nominal interest rate or bond yield that
represents compensation for unfavorable tax status

Term Structure relationship between time to maturity and yields, does not
include default risk premium

Total Return

Dividend Yield + Capital Gains Yield

treasury yield curve


maturity

a plot of the yields on treasury notes and bonds relative to

US Treasury securities As interest rates fluctuate, the value of Treasury security


fluctuates, not risk free ; generally considered to be free of default risk

Value of Stock

present value of expected cash flows

Value of Stock

the present value cash flows of all future dividend

When interest rates decrease, bond prices... Increase

When interest rates increase, bond prices... Decrease

When YTM = coupon rate... par value=bond price

Yield Curve

graphical representation of term structure

Normal - upward sloping


Inverted - downward sloping

Yield to Maturity rate required in the market on a bond

YTM<coupon rate

par value (face value) <bond price (premium)

zero coupon bonds


a bond that makes no coupon payments and thus is
initially priced at a deep discount
financial management The planning, organising and controlling of financial or
monetary resources to achieve the goals of a business

profitability Objective: measured by deducting expenses from revenue and is


reported in the income statement. Financial managers will balance cash flow and
profit

liquidity Objective: the cash-flow position of a business - if a business can pay it's
debts when they are due

efficiency Objective: greater efficiency reduces costs and increases profitability

solvency Objective: the ability to meet long-term financial obligations

growth Objective: growing involves taking risks and can cause cash flow issues

return on investment Objective: maximising the investor's return, so that they don't
withdraw

short-term objectives Maximising profits or market share or liquidity

long-term objectives Growth, profitability and efficiency

owner's equity Internal Source: funds provided by the owner, cash from savings,
sale of assets and borrowings which the owner is responsible for paying

retained profits Internal Source: the net profit

overdrafts External/Short-Term: an agreement with the bank that allows a business


to overdraw it's cheque account, with a fee

bank bills External/Short-Term: a commercial bill is issued by a business to raid


funds, the bill pays no interest but the investor gets a return equivalent to interest.
The business pays a fee to the bank and reimburses it

promissory note External/Short-Term: similar to a commercial bill, but is issued on


the name of the borrower and the bank takes no responsibility for it

factoring External/Short-Term: the selling of a company's accounts receivable to


another company at a discount, for cash

leasing External/Long-Term: the business pays for the right to use an asset but does
not own it

term loans External/Long-Term: are for 3-5 years with fixed payments and are
secured with specific assets

mortgages External/Long-Term: usually long term over real estate, as value


appreciates

debentures External/Long-Term: a type of loan that is secured by the assets of the


issuing business. A security issued by large businesses or government agencies

unsecured notes External/Long-Term: similar to debentures but not secured by


assets

ordinary shares Equity Source: the most common type of shares held by part
owners of the company up to the value of their shares. Can be brought when the
company floats on the stock exchange

rights issues Equity Source: allow current/existing shareholders the first opportunity
to purchase a new issue of ordinary shares in proportion to their existing shares

share placements Equity Source: shares are offered at a discount to special


investors or large institutional investors, which encourages potential investors

private equity Source: a way of financing a business by private investors purchasing


all the shares in a business and then owning the business

banks Financial Institutions: the largest providers of investment funds

investment banks Financial Institutions: smaller than commercial banks and


specialise in the provision of services to corporate clients. Three main functions
include: investment management -> corporate financial advice -> money market
dealings

finance and insurance companies Financial Institutions: finance companies raise


funds through debenture issues and provide medium-term financing to companies
and smaller businesses

superannuation funds Financial Institutions: occupy a growing area of the financial


system because of the spread of private superannuation and compulsory employer
superannuation. They are a major holder of shares


companies Financial Institutions: have the ability to raise finance themselves and
can issue debentures and promissory notes and certain types of bonds

ASX Financial Institutions: the Australian Securities Exchange enables public


companies, statutory corporations and governments to have access to a wider
variety of funds

ASIC Government Influence: Australian Securities and Investment Commission is


responsible for regulating business activities. Companies must lodge financial
reports to ASIC and this government body can legally prosecute a company that
breeches the law

company taxation Government Influence: has been reduced to 30% of profits. By


having operations in a variety of countries, companies can make taxation services

economic outlook Global Market Influences: Australia is a capital-importing nations.


GEO: Global Financial Crisis

availability of funds Global Market Influences: Australia is seen as a low risk country
for investment and so has attracted high levels of foreign investment

currency fluctuations Global Market Influences: traders must decide in which


currency a contract will be written. A spot contract means that when the transaction
is made the prevailing exchange rate at that time is applicable

interest rates Global Market Influences: changes in interest rates can increase the
costs of funds for a business who borrows from overseas, and can impact
willingness and ability to purchase

financial needs Planning and Implementing: these include budgeting, planning,


valuing assets, raising finance and monitoring the financial policies and procedures
of the business


budgeting Planning and Implementing: developing financial forecasts and budgets
that allow the business to budget for production, employment of human resources,
raising appropriate funds from appropriate sources and budgeting for other
operations

records and recording systems Planning and Implementing: developing accounting


systems and ways of recording the expenses and revenues of the business as well
as record keeping and financial accountability policies and procedures

financial controls Planning and Implementing: developing financial systems that


allow the management to monitor and control both finances and operations, make
decisions about operations and achieve the business's financial and business
objectives

gearing or leverage the amount of debt to equity capital in a business or company,


a leveraged or highly gear business is a greater risk when investing

debt financing Processes: the funding of a business through external or borrowed


funds

equity financing Processes: the funding of a business through selling ordinary


shares, or the amount of assets owned by a person within an enterprise. More
expensive than debt financing because shareholders expect dividends

short-term finance Bank overdrafts, short-term loans, bills of exchange and acquired
trade credit -> grants trade credit and helps purchase inventories

long-term finance Share capital, mortgage loan, long-term loan, debentures -> land,
buildings, machinery and motor-vehicles

cash-flow statement Shows how much cash came into the business, how much cash
was paid out, a cash flow forecast, can determine a businesses solvency


income statement Shows how much the business sold, how much it cost to sell and
what profit was made. Also called a profit and loss or revenue statement. Indicates
the level of profit and the operations that caused this

balance sheet Shows the assets owned and the liabilities owed, the contributions
made by owners and how much the business is worth.

current ration Shows the liquidity (ability to pay current debts) of the business, and
so the ratio should be more than one.
Current Assets/Current Liabilities

debt to equity ratio Shows the gearing (level of debt to equity) of a business. Should
be about 1:1
Total Liabilities/Equity Funds

gross profit ratio Indicates what percentage of each sales dollar is gross profit,
should be looked at in a trend and compared to competitors
Gross Profit/Sales

net profit ratio Measures the percentage of each dollar of sales that is left over to
pay tax and returns to lenders and owners - the return on sales. Should never be
negative.
Net Profit/Sales

gross profit Sales Revenue - Cost of Sales

return on equity ratio Measures the net profit before tax and compares that to the
equity of a business, reflects asset and financial structure, measuring the owner's
reward for the risks involved in keeping the business running
Net Profit/ Total Equity


expense ratio The proportion of expenses to sales, should be balanced.
Total Expenses / Revenue(Sales)

accounts receivable turnover ratio Measures how long a business takes to collect
money from its creditors, should be a low number or equal to or less than the
industry average
365/(Sales/Accounts Receivable)

comparative ratio analysis Ratio Business A/Ratio Business B

time comparisons Comparing information from the current period with previous
periods to reveal a trend

industry average comparisons Comparing a businesses information with the


industry average, available on the ASX, to locate their position amongst competitors

general business standards Used by analysts who research businesses. Commonly


accepted benchmark standards apply to all businesses

normalised earnings Businesses sometimes report their annual earnings over a


period of years and these normalised earnings are often adjusted for inflation,
painting a falsely favourable impression

capitalising expenses Turns expenses into assets and may not represent the true
financial condition of the business. This understates expenses and overstates profits
and assets

valuing assets Overstating the value of assets to improve the appearance of their
balance sheet

timing issues Financial statements represent the past performance of a business


and carry no guarantee of future results

debt repayments A high level of gearing can represent a point of concern, however,
higher levels of borrowed money can also bring future economic benefit when
invested properly. Making comparisons between companies can therefore be
difficult as some businesses and industries can safely carry high debt repayments
while others can't

ethical issues related to financial reports Disclosure, best practice and following
conventions and principles is important in the preparation of financial reports and is
governed by ASX rules and managed by ASIC and CPA

distribution of payments Cash Flow Management: Planning for regular expenditure,


some businesses plan to pay bills at the latest possible date

expenses minimisation and discounts for early payment Cash Flow Management:
Most businesses purchase their supply needs on credit and pay by cheque on the
due date, some obtain discounts for early payments - a reward for paying with cash
or within a shorter timeframe

working capital formula = Current Assets - Current Liabilities

working capital Refers to the business's ability to meet its day to day financial
needs. Aims to increase the efficiency with which a business uses its current assets
and meets its current liabilities, there needs to be a balance between profitability
and liquidity

successful management of working capital Minimise investment, relate working


capital to sales levels and the cash flow cycle, make the most of working capital and
balance current assets and liabilities

inventories Finished goods, Raw materials and Work-in-Progress inventories


lease-back Selling assets and then leasing them back from the purchaser helps to
liquidate assets and raises finance without debt

fixed costs Remain the same no matter what the level of output

variable costs Change directly as output changes

cost centres Business units to which a business allocates costs

marketing objectives The marketing team works to generate revenue to fulfil the
needs of the expenditures of a business, plus make a profit

sales mix Increase revenue by concentrating on selling particular products within


the selling range, offering optional extras or special deals

pricing policy May be allowed to fluctuate, must take into account the costs of
production, 'trade price' gives discounts to tradespeople and incentives include
discounts and sales promotions

exchange rates Impact businesses that trade internationally, on where they produce
and purchase and the price of their raw materials

overseas borrowing Direct Foreign Investment is where companies fun overseas


subsidiaries by direct establishment or by taking over existing companies
Portfolio Investment is where as business borrows funds from overseas investors but
retains control over their business

payment in advance Telegraphic transfer of funds through a bank on acceptance of


order. Preferable to the exporter but not to the buyer unless goods are urgently
required


clean payment The buyer remits payment for the goods through a bank when the
goods are received. The exporter loses control of the goods and relies on the credit
standing of the buyer to make payment

letters of credit The irrevocable documentary credit of any overseas bank confirmed
by an Australian bank. LC = Letter of Credit, ILC = Irrevocable Letter of Credit, and
Confirmed ILC

bill of exchange Documentary Sight, the exporter retains control of the goods until
the payment is received
Documentary Term, the bill is accepted by the buyer and the documents are
released to them. Exporter loses control, relies on buyer's credit standing and
integrity

hedging Entering into a contract to buy/sell foreign exchange at a set date and a
specified rate to reduce financial risk

derivatives Investment instruments that derive their value from a potential further
return, e.g. the futures market. Based on the sales of securities, valued by tangible
securities such as shares, bonds and commodities