Chapter15-16

risk-return trade-off

A basic principle in finance that holds that the higher the risk, the greater the return that is required.

term loan

A business loan with a maturity of more than one year; can be unsecured or secured.

mutual fund

A financial-service company that pools investors' funds to buy a selection of securities that meet its stated investment goals.

interest

A fixed amount of money paid by the issuer of a bond to the bondholder on a regular schedule, typically every six months; stated as the coupon rate.

factoring

A form of short-term financing in which a firm sells its accounts receivable outright at a discount to a factor.

revolving credit agreement

A guaranteed line of credit whereby a bank agrees that a certain amount of funds will be available for a business to borrow over a given period, typically two to five years.

mortgage loan

A long-term loan made against real estate as collateral.

stockbroker

A person who is licensed to buy and sell securities on behalf of clients.

exchange traded fund (ETF)

A security similar to a mutual fund; holds a broad basket of stocks with a common theme but trades on a stock exchange so that its price changes throughout the day.

common stock

A security that represents an ownership interest in a corporation.

M2

A term used by economists to describe the U.S. monetary supply. Includes all M1 monies plus time deposits and other money that is not immediately accessible.

line of credit

An agreement between a bank and a business that specifies the maximum amount of unsecured short-term borrowing the bank will allow the firm over a given period, typically one year.

preferred stock

An equity security for which the dividend amount is set at the time the stock is issued and the dividend must be paid before the company can pay dividends to common stockholders.

Federal Deposit Insurance Corporation (FDIC)

An independent, quasi-public corporation backed by the full faith and credit of the U.S. government that insures deposits in commercial banks and thrift institutions for up to a ceiling of $250,000 per account.

bank charter

An operating license issued to a bank by the federal government or a state government; required for a commercial bank to do business.

money

Anything that is acceptable as payment for goods and services.

municipal bonds

Bonds issued by states, cities, counties, and other state and local government agencies.

currency

Cash held in the form of coins and paper money.

options

Contracts that entitle holders to buy or sell specified quantities of common stocks or other financial instruments at a set price during a specified time.

circuit breakers

Corrective measures that, under certain conditions, stop trading in the securities markets for a short cooling-off period to limit the amount the market can drop in one day.

pension funds

Large pools of money set aside by corporations, unions, and governments for later use in paying retirement benefits to their employees or members.

futures contracts

Legally binding obligations to buy or sell specified quantities of commodities or financial instruments at an agreed-on price at a future date.

bond ratings

Letter grades assigned to bond issues to indicate their quality or level of risk; assigned by rating agencies such as Moody's and Standard & Poor's (S&P).

unsecured loans

Loans for which the borrower does not have to pledge specific assets as security.

secured loans

Loans for which the borrower is required to pledge specific assets as collateral, or security.

bonds

Long-term debt obligations (liabilities) issued by corporations and governments.

over-the-counter (OTC) market

Markets, other than the exchanges, on which small companies trade; includes the Over-the-Counter Bulletin Board (OTCBB) and the Pink Sheets.

demand deposits

Money kept in checking accounts that can be withdrawn by depositors on demand.

broker markets

National and regional securities exchanges that bring buyers and sellers together through brokers on a centralized trading floor.

credit unions

Not-for-profit, member-owned financial cooperatives.

dividends

Payments to stockholders from a corporation's profits.

stock dividends

Payments to stockholders in the form of more stock; may replace or supplement cash dividends.

electronic communications networks (ECNs)

Private trading networks that allow institutional traders and some individuals to make direct transactions in the fourth market.

commercial banks

Profit-oriented financial institutions that accept deposits, make business and consumer loans, invest in government and corporate securities, and provide other financial services.

retained earnings

Profits that have been reinvested in a firm.

accounts payable

Purchases for which a buyer has not yet paid the seller.

reserve requirement

Requires banks that are members of the Federal Reserve System to hold some of their deposits in cash in their vaults or in an account at a district bank.

accounts receivable

Sales for which a firm has not yet been paid.

dealer markets

Securities markets where buy and sell orders are executed through dealers, or "market makers," linked by telecommunications networks.

thrift institutions

Depository institutions formed specifically to encourage household saving and to make home mortgage loans.

time deposits

Deposits at a bank or other financial institution that pay interest but cannot be withdrawn on demand.

investment bankers

Firms that act as intermediaries, buying securities from corporations and governments and reselling them to the public.

securities

Investment certificates issued by corporations or governments that represent either equity or debt.

institutional investors

Investment professionals who are paid to manage other people's money.

capital expenditures

Investments in long-lived assets, such as land, buildings, machinery, equipment, and information services, that are expected to provide benefits over a period longer than one year.

marketable securities

Short-term investments that are easily converted into cash.

principal

The amount borrowed by the issuer of a bond; also called par value.

financial management

The art and science of managing a firm's money so that it can meet its goals.

Federal Reserve System (Fed)

The central bank of the United States; consists of 12 district banks, each located in a major U.S. city.

financial risk

The chance that a firm will be unable to make scheduled interest and principal payments on its debt.

trade credit

The extension of credit by the seller to the buyer between the time the buyer receives the goods or services and when it pays for them.

National Association of Securities Dealers Automated Quotation (NASDAQ) system

The first and largest electronic stock market, which is a sophisticated telecommunications network that links dealers throughout the United States.

cash flows

The inflow and outflow of cash for a firm.

discount rate

The interest rate that the Federal Reserve charges its member banks.

return

The opportunity for profit.

risk

The potential for loss or the chance that an investment will not achieve the expected level of return.

selective credit controls

The power of the Federal Reserve to control consumer credit rules and margin requirements.

financial intermediation

The process in which financial institutions act as intermediaries between the suppliers and demanders of funds.

capital budgeting

The process of analyzing long-term projects and selecting those that offer the best returns while maximizing the firm's value.

underwriting

The process of buying securities from corporations and governments and reselling them to the public; the main activity of investment bankers.

cash management

The process of making sure that a firm has enough cash on hand to pay bills as they come due and to meet unexpected expenses.

open market operations

The purchase or sale of U.S. government bonds by the Federal Reserve to stimulate or slow down the economy.

primary market

The securities market where new securities are sold to the public.

secondary market

The securities market where old (already issued) securities are bought and sold, or traded, among investors; includes broker markets, dealer markets, the over-the-counter market, and the commodities exchanges.

M1

The total amount of readily available money in the system; includes currency and demand deposits.

insider trading

The use of information that is not available to the general public to make profits on securities transactions.

commercial paper

Unsecured short-term debt—an IOU—issued by a financially strong corporation.