Financial Management

Gordon

#2 ___ Growth Model Dividend "Grows" over time - look for this word on OA to know it's a Gordon Growth Model problem Value of stock with dividend growth rate 1. Stock Price = Expected Dividend / (required return - growth rate) - Expected Dividend = LAST dividend * (1+ growth rate) 2. Required Return = (Expected Dividend / Price) + Growth Rate

Pricing higher

#3 Capital Asset ___ Model (CAPM) - Required Return to Investors in a SPECIFIC Stock -This component calculates what will make investing in riskier stock (anything not treasury or 100% risk free) worth it to the investors High risk stocks have a __ required return Market Return = average expected return on all stocks Risk Free Rate = The Yield on U.S. Treasury Bonds Beta = index of relative riskiness of an individual stock (1 for average risk) Required Return = Risk-Free Rate + Beta(Market Risk Premium) Market Risk Premium = Market Return - Risk-Free-Rate

perpetuity

A ___ is a "perpetual annuity" or an unending series of equal payments. ___ are frequently associated with charitable giving.

Syndicate Syndication

A group of intermediaries that is used to oversee the issuance of stocks and/or bonds. Loan _____ is the process of involving a group of lenders in funding various portions of a loan for a single borrower. Generally made up of large banks or other institutional investors. Might also be the underwriters of the security issue.

APY EAY

APR - The quoted annual rate __ - the effective yield, incorporating periodicity of interest payments APY = [(1 + APR/Periods) ^ Periods ] - 1 APY = __ one and the same

systematic

According to the CAPM, only ___ risk affects the expected return of an individual stock.

decrease decrease

Bond Valuation : Time Value of Money Inverse relationship between price and yield (interest rate). Increase in yield (interest rate) causes bond price to ___ Increase in price causes yield to ___

Return Market risk

CAPM : Capital Asset Pricing Model E(R) - Required rate of ____ Rf - Risk Free Rate (Treasury Bills - Government) B - Beta RM - ___ rate E(R) = Rf + B(RM-Rf) (RM - RF) - Market Premium that represents the idiosyncratic ___ of the market Market rate = Market ___ plus the Risk Free Rate

25

CFI = Change in Gross PPE x (-1) or CFI = (Change in Net PPE + Depreciation Expense) x (-1) Gross PPE = Net PPE + Accumulated Depreciation Change in Gross PPE = Change in Net PPE + Depreciation Expense 2017 Gross PPE 500 Accum. Depreciation 100 Net PPE 400 2018 Gross PPE 525 Accum. Depreciation 120 Net PPE 405 CFI = ___

Depreciation assets success

CFO = Net income + ____ expense - increase in net working capital Net working capital = current ___ minus current liabilities Stock analysts often focus on CFO as an indicator of the ___ of the "Core Business" of the company

Dividend Capital

Calculating Actual Returns to Stock Investors Sources of Return : ___ paid to investor ___ Gain/Loss: Sales price minus purchase price

Gordon today One

Calculating the NPV (net present value) of the dividend stream : ___ Growth Model Assumes constant dividend payments Calculating SHARE Value : Vo = Value ___ D1 = dividend paid in ___ YEAR (calculate in the interest!!!) Kps = desired return g = expected growth Vo = D1 / (Kcs - g) Finding Desired Return : Kcs (return) = [D1 (Dividend) / Vo (Stock Value)] + g (growth) Calculating Preferred Stock Value : Vo = D1 / Kps

Initial Differential Terminal

Capital Budgeting Evaluating potential investment projects ___ cash out-flow : the up-front cost to buy and install equipment ___ cash in-flow : yearly cash flows (profit) generated throughout the life of the project ___ cash in-flows: end of project salvage value

reduce not added terminal last

Capital Budgeting (for investments) Equipment sold when being replaced will ___ the investment Studies, Reports, Surveys, etc. are ___ included in Initial Outlay Differential cash flow is net income with depreciation expense ____ back. ___ cash flow is salvage value plus working capital return Terminal cash flow is added to the ___ year of differential cash flow when calculating NPV and IRR

DCF

Capital Budgeting : 2nd type Differential Cash In-Flows (___) Differential Cash In-Flows = Incremental (Net Income + Depreciation) PER YEAR DCF is a series of cash inflows over the life of the equipment (or investment)

TCF

Capital Budgeting : 3rd type Terminal Cash In-Flows (___) Terminal Cash In-Flows = Salvage Value - Taxes Paid + NWC Recapture (e.g. inventory decrease) Taxes Paid = ( sold value - book value ) Tax rate This last year of cash flows (TCF) is added to the last year of DCF.

ICF NEGATIVE

Capital Budgeting: 1st Type Initial Cash out-flow (__) ICF = Cost of asset + Shipping and Installation + Increase NWC (net working capital) ICF is a __ cash flow What is the addition to Gross PPE? Cost of Asset + Shipping and Installation

Operating Interest Profitability

Capital Structure : Determining the optimal mix of leverage. Operating Leverage (DOL) : (aka business risk) - Fixed ___ Costs. Automated production - high fixed costs Labor intensive production - low fixed costs. Financial Leverage (FOL): (aka financial risk) - Fixed ___ expense. High Debt/Equity Ratio: High fixed interest expense Low Debt/Equity Ratio: Low fixed interest expense Combined Leverage: Operating Leverage * Financial Leverage Firms increase leverage to increase ___

Present Rate

Captial Budgeting has two analysis outputs Net ___ Value (NPV) : The dollar value of the project. - Present value of differential cash flows - plus present value of terminal cash flows - less the investment:equipment and working capital Internal ___ of Return (IRR) - The implicit rate of return using the investment, diff cash flows and terminal cash flows.

Bonds

Corporate ___ : a debt instrument that is issued by a corporation in order to raise capital.

sensitivity

Corporations typically use __ analysis to see what could go wrong. They take a pessimistic, base and optimistic approach and compare the WACC, IRR and NPV's for each result. Many firms take probabilities for each circumstance and calculate the expected NPV using weighted averages.

Capital

Cost of ___ : The price of raising money -Bank loan - interest rate -Bond - Yield to maturity - INTEREST -Preferred Stock - Established dividend rate -Common Stock - Cost of common stock is often CAPM expected rate of return Weighted Average

supply demand

Coupon Rate vs Bond Yield Par Price : Price = Face Value -Bond Yield = Coupon Rate Premium Price : Bond Yield < Coupon Rate -Bond price increase lowers bond yield Discount Price : Bond Yield > Coupon Rate -Bond price drop increases bond yield Why might the bond price change? To adjust to market __ and __

Affirmative Negative

Covenants: The indenture also lists the covenants associated with the bond. These covenants outline things the company is obligating itself to do or not do in order to protect bondholders. ___ covenants describe things the company pledges itself to do. ____ covenants are things the company pledges to not do—for example, not to sell off certain assets, not to pay out large dividends, or not to issue new debt with a superior client.

Operations Work PPE outflow

Day to Day ___ : Current assets and current liabilities Net ___ Capital : Current Assets - Current Liabilities Gross __ = Net PPE + Accumulated Depreciation Increase in asset = cash outflow Increase in liabilities = cash inflow increase in net working capital = cash ___

CFF (Cash flow financing) Sales Mangement

Discretionary Funding Needed (DFN) : Projecting the firm's need for additional funding for operations DFN is raised by ___ The balance sheet must balance Assets = liabilities + equity DFN = Assets - Liabilities - Equity Spontaneous accounts : vary with ___ - aka Net Working Capital e.g. Current assets and current liabilities Discretionary Accounts : changed by ___ decision e.g. plant and equipment do not vary automatically with sales

one all

Diversification : Eliminates Idiosyncratic Risk Idiosyncratic Risk : events that impact on a ___ firm (ex: fire destroys factory) Systemic Risk : events that impact ___ firms (ex. economy in recession) Total risk = idiosyncratic risk + systematic risk

banks banks Accredited

Dodd Frank - Addresses too big to fail ___ Sarbanes Oxley - transparency; auditor of internet controls FINRA - self-regulatory organization to monitor security sales practices SEC - requires audited financial statements; regulates security trading Volker Rule - prohibits proprietary/hedge fund trading by ___ Form 10-K - Annual audited financial statements filed with SEC Rule 144A - Sell private securities in US to "___ investors" Reg S - Sell private securities outside of US to foreigners Securities Act of 1933 - Requires prospectus for stock issuance Prospectus - Financial disclosure required to issue public securities FSOC - Financial Stability Oversight Council monitors bank system risk IFRS - International Financial Reporting Standards

Assets Fixed income

Efficiency Ratios Total __ Turnover : Sales / Total Assets ___ Asset Turnover : Sales / Fixed Assets OIROI (Operating __ return on investment) operating income/total assets

spread

Factors affecting a Bond's Required Yield Treasury Yields : Corporate bonds trade a "spread" over Treasury ___ - reflects riskiness of corporate bond versus risk-free treasuries Riskiness: AAA-rated bonds have lower yields than BBB-rated bonds Term: Long-term bonds have higher yields than short-term bonds - LT bonds have more credit risk and more market risk Collateral: Collateralized bonds have lower yields due to less risk Taxes: Tex exempt bonds have lower yields - municipal : exempt from Federal tax, except "private activity" - Federal: exempt from State tax, except Fannie and Freddie

Trend Cross Goal Yes

Financial Ratio Analysis Types of Analysis : ___ Analysis : Compares ratios of a firm over time Cross-Sectional : Compares firm to competitors or industry average __ Monitoring : measure performance against goals Pitfalls : Timing Issues : fiscal years of firms may differ Seasonal : some firms have seasonal sales Accounting Policies : accounting methods may differ Cross Industry : Ratios may not be comparable Read: Yes or No?

Yes

Financial Ratios Liquidity : Bill-Paying Capacity -Current Ratio (curr ass/curr liab) Quick Ratio (curr ass - inv/curr liab) Efficiency: Asset-Productivity Asset Turnover : sales/ass fixed ass turnover : sales / fix ass Financing: Reliance on Debt vs. Equity Debt ratio : liab/ass Financial Leverage : ass/equity Profitability: Return on Equity : net income/equity Return on Assets : net income/assets Financial Ratios are a rough, simplified approach to evaluating firm performance. Read it? Yes or No

Debt interest Leverage

Financing Ratios __ Ratio: Total liabilities / Total assets Times ___ earned : EBIT/Interest Expense Financial ___ Ratio : Total assets / Equity

Venture Public Syndicate Primary Secondary Backs Auction Dealer

Financing the Firm (options) __ Capitalist : provides equity to a new private firm in exchange for part ownership - shark tank IPO (initial __ offering) : A public corporation's initial sale of stock ____ : Group of investment banks underwriting the issue __ Market : Firm issues stock/bonds to be bought by investors - corporation raises cash ___ Market : Stocks/bonds are traded among investors - firm is not involved Buy __ : Corporation buys back its own stock/bonds from investors Two types of markets ___ Market : competitive bid/ask from many buyers and sellers ___ Market : a dealer buys and sells securities upon investor inquiry

Comparable

Firm Valuation Valuation of Private firms Most widely used method : ___ Multiples Method - PE (price earnings) Ratio Stock Price of Private Firm = PE ratio of public Firm * EPS of Private Firm Firm Value = Stock Price * Shares Outstanding

private

Firm Valuation Valuation of __ firms 3 Valuation Methods Replacement Cost Good For easy-to-value assets Not good for intangible assets Comparable Multiples: PE (price earnings) Ratio This is the most widely used method Discounted Cash Flow: Good for well established firms where cash flow is easily forecasted year after year

Public

Firm Valuation Valuation of a __ Corporation - Very simple Value of a share = market price of stock in active trading Value of firm = Stock price * Shares Outstanding

Shareholder Agency

Goal of the Corporation : Enhance Long-Run ___ Value Requires financial decision-making based on: Current market prices & yields Balancing Risk and Return Market Metrics used for investment evaluation "___ Cost" - Managers acting in self-interest rather than Shareholders interests. ___ cost reduces shareholder value.

5 Should

Gordon Flaw: Must project dividend growth rate "forever". What about firms that do not pay dividends? Solution : Project EPS growth rate for the next __ years. Assume long term growth rate after __ years of 5% Intrinsic value is what the market price ___ be -- PV of expected cash flows

Today

Gordon Growth Model : Finding the value of the stock ___ (Constant dividend growth model) - a perpetuity, modified for the growth of dividends

NOT

Higher profits may __ mean a higher stock price! Corporations must balance risk and return. Incremental profit should justify added risk of debt increasing. Firms must manage risk-adjusted profits to maximize stock value.

fix higher less

How to hedge FX risk : 2 Types 1. FX forward contracts (trade between 2 companies) 2. FX futures contracts (trade executed on exchange) Forward/Futures contracts "__" the FX rate for future transactions The stronger the US dollar the __ amount of imports (cheaper) and the __ amount of exports (more expensive).

Yield Price

IRR is another word for ___ PV is the ___ Treat Investment Projects the same as bonds with your TVM calculations! Unless DCF (pmt) is not the same every year.

risky

If debt is cheaper than equity, why not use all debt? As the debt ratio increases, the firm is viewed as increasingly ___. Required bond and equity yields rise and eventually increase WACC.

equal greater less

If the firm is as risky (in systematic terms) as the market, then the firm's β will __ one. If the firm is more risky than the market, the firm's β will be ___ than one, and if the firm is less risky than the market, the firm's β will be ___ than one.

competitive negotiated

In general, a firm issuing a bond can place the bonds with a syndicate in two ways. The first way is through a ___ sale. - those wishing to underwrite the bond will submit bids to the issuing firm. The second way is through a ___ sale. - similar to above except a much more thorough interview process

Risks

International Business Exposure International Business Exposure: Exporting products and services Importing products and services Outsourcing Production Foreign Subsidiaries Foreign Debt Issuance International Business ___ Foreign Exchange Rate (FOREX) fluctuations Political Risk : Confiscation Currency Restrictions International Interest Rate Fluctuations

low

Investors generally prefer stocks with high returns and __ associated risk.

volatility

Leverage increase the __ of profits. (higher highs and lower lows - riskier)

Liquidity Current Quick

Liquidity Ratio ____ Ratios monitor how much cash (or assets) a company has in relationship to its liabilities. ____ Ratio: Current assets divided by current liabilities Acid test or ___ ratio : Current assets less inventory divided by Current liabilities - a more strict measure of liquidity

Receivable Collection Turnover Hand

Liquidity/Operational Ratios Accounts ___ Turnover : Credit sales/Average A/R Average ____ Period : 365 (days in a yr)/ A/R Turnover Inventory ____ : Cost of goods sold / Average inventory Days on ___ : 365 / Inventory Turnover

optimize

Managing the Stock-Bond Mix Firm reliance on equity: stock issuance stock buy-back dividend payouts Firm reliance on bonds Bond issuance Bond maturities Bond Buy-Backs Adjust stock-bond mix to ___ financial management

par discount premium

Market Rate = Coupon Rate; Bonds will sell at __value ($1,000) Market Rate > Coupon Rate; Bonds will sell at a ___ Market Rate < Coupon Rate; Bonds will sell at a ___value

Operating Financial Combined

Measuring operating and financial leverage Degree of ___ leverage : (Sales - Variable costs) / EBI Degree of ___ leverage : EBIT/ (EBIT - Interest) Degree of ___ leverage : (Sales-Variable Cost)/(EBIT - Interest) Leverage increases the volatility of profits.

Advantage Outsourcing benefits

Most corporations have exposure to international business operations Comparative __ Theory - if each nation exploits it's production "relative efficiency advantage" all nations will be better off. ____ : Exploits production efficiency world-wide Tariffs : Protect inefficient firms that have difficulty responding to change. This also reduces the __of trade to society.

Margin Net income Payout

Net ___ = Net income / sales ___ ___ = Dividends Paid + addition to retained earnings ____ ratio = Dividends Paid / Net Income

face

Par value: Also known as the __ value of the bond, the par value is the sum of money that the corporation promises to pay at the bond's expiration.

Assets Return Gross Operating Net

Profitability Ratios Return on ___ : Net Profit / Average Total Assets ___ on Equity : Net Profit / Average Total Equity ___ Margin : Gross Profit / Sales ___ Margin : EBIT/Sales __ Margin (Net Profit Margin): Net Profit/Sales

intrinsic

Recall from our discussion of bond valuation that the __ value of any asset is the present value of the stream of expected future cash flows discounted at an appropriate required rate of return. To pick a good stock : Pick a company that is undervalued

NPV

Rules for Adopting Potential Investments Internal Rate of Return (IRR) and Net Present Value (NPV) 1. IRR>WACC: The project IRR must be greater than the WACC IRR = Revenue from asset WACC = cost of funds Profit = IRR minus WAC 2. NPV > 0 : The NPV, discounted at the WACC, must be positive If IRR = WACC, then NPV = zero Profit = NPV The __ rule is the preferred valuation approach used by most corporations

Face Coupon Payment Maturity price

Stocks : Equity Investment Bonds : Debt Investment __ Value : Dollar amount of the corporate debt to the investor (usually $1,000) Legal Provision of a Bond : Indenture __ rate : Percent used to calculate the annual interest payments to investor Interest ___ dates : Schedule of days for interest payments (usually semi-annual) ___ : The date at which the bond matures and Face Value is repaid to investor All are fixed legal obligations of the corporation that must be bet to avoid bankruptcy. A bond's ___ is set by supply and demand in financial market trading

variable fixed

Stocks are ___ -return securities; bonds are ___-return securities

Value Present Future Interest

TVM (Time __ of Money) : The value of money depends on WHEN you receive it! Financial markets use the interest rate to determine how much. ___ value : The value of cash today ___ value : The value of cash in the future ___ rate : The metric that translates between present value and future value

reduces reduces NOT

Tax destructibility: Interest is deductible as an expense for corporations. It __ the cost of interest because taxes do not have to be paid. The ability to deduct interest ___ the cost of debt. What we do is take the interest cost and multiply by (1 - tax rate). The remainder is the interest payable. Note: If a question asks for pre-tax WACC, you do __ adjust for taxes when calculating the cost of debt.

specialist spread liquidity lower

The NYSE has a single individual with the title of specialist, who provides liquidity to the market. This specialist faces risk in holding an inventory. Causing certain changes in selling patterns : The difference between the bid price and the ask price is called the bid-ask ___. The bid-ask spread is compensation to the specialist for providing ___ to the market. The NYSE specialist will charge a ___ price to sellers of the stock and a higher price to the buyer of the stock.

corporate

The control issues involved in running a company are collectively known as ___ governance.

shareholder

The goal of the firm is to maximize ___ value.

multiple

The idea behind having ___ dealers providing liquidity to investors is that the dealers must compete with one another, thus lowering the cost of transacting.

public

The primary market for stock issuance works in a similar way to the bond primary market. However, some terminology is different. A firm that is going public (or selling shares of ownership for the first time) is going to perform an initial ___ offering (IPO). These IPOs are sometimes called new equity offerings.

discretionary EFN

The question that forecasting answers is given our expectations for future growth (in sales, in asset base, etc.), how much financing will we need in the next one, five, or ten years? This additional financing is called the ___ financing needed or DFN. Also known as the external financing needed (___), the DFN is based upon our forecast.

Maturity

The rate of return investors receive on a bond is called the: Yield to ___

cash

The value of a bond (price you would be willing to pay today) is the present value of its future __ flows. This includes any coupon payments it may have and its future value (the face value paid at maturity).

Market Limit

There are several different types of orders used by investors, but we will focus on the two most common types: market orders and limit orders. _____ orders : Orders used by investors that are time sensitive and are executed on a "first come, first serve basis" ____ orders : Orders used by investors that are executed only if market prices reach the "limit" price

prices Buy Sell

There is no such thing as a "good" stock and "bad" stock. There are only "good" __ and "bad" ___! If market price < intrinsic value : ___ If market price is > intrinsic value : ___

constant grows discount

Three Analytical Frameworks for Stock #1 Single Holding Period Stock Value - Dividend is ____ (look for "1 year" and you can use calculator) #2 Gordon Growth Model Dividend ___ over time #3 Capital Asset Pricing Model (CAPM) Determines the right __ rate for valuation of stock

U.S.

Treasury securities are generally bonds that are issued by the ____ government.

added debt

WACC - Weighting Concept Simply put, the costs are multiplied by the percentage of total capital dollars for each source and then __ up. Don't forget to reduce ____ cost by 1 minus the tax rate.

Cash Collection Disbursement Operating Reserve

WC Management : Manage cash resources for daily operations __ cycle : cycle from buying resources to collected cash from sales ____ float : time from customer check to cash in bank ___ float : time from check issued to bank balance drawdown ___ balance : Amount of cash to pay for immediate bills __ balance : cash held for unforeseen needs 2/10 net 30 : 2% discount for payment within 10 days; due in 30 days

debt equity

We will understand the tradeoff between using ___ (bonds) or ___ (stocks) to finance some investment.

Average

Weighted ___ : Expected Return on a Stock - using probabilities as weights.

Intrinsic

Why do stock prices fluctuate? Risk Free Rate : Changes in Treasury interest rates EPS - earnings per share: Changes in investor expectations of a firm's profit growth Risk Premium : Changes in investor risk-aversion (ex: investors start worrying about a recession) Beta: Changes in firm's relative profit volatility Event Risk: Events specific to the firm Daily economic, political and international events impact these factors : Fluctuations in investor estimates of "___ value"

earnings

With accrual accounting, revenue is recognized when the ___ process is complete.

increase

Working Capital Management Managing current assets and current liabilities - short term liquidity To __ cash flow - minimize the current ratio : Accounts Receivable / Accounts Payable Key working capital ratios Cash ratio = cash / current liabilities Quick ratio = (current assets - inventory) / current liabilities Receivables Turnover = sales / accounts receivable Day's sales in receivables = 365 days / receivables turnover

SGR growth Dividends

__ - sustainable ___ rate (think CFO) - is the growth rate of sales that can be found without external financing. SGR is supported by CFO - cash flow from operations SGR = ROE (net income/equity) * (1-Payout Ratio) Payout Ratio = ___/Net income

Endless Increasing Preferred Common

__ stream of payments : Perpetuity PV = Payments / Interest Rate Growth Perpetual Annuity : Endless stream of ___ Payments Used to compute the value of ___ stock. Has no maturity date but the dividend stays the same. PV = Initial Payment / (interest rate - growth rate) Used to compute the value of __ stock. - Has no maturity date but the dividend grows over time.

Bonds

___ (and indeed all loans) are classified as fixed-income securities, meaning that they pay a fixed interest payment each year.

Stocks

___ : An equity instrument that is issued by a firm and represents a share of ownership in a particular company.

CFF

___ : Cash raised by selling bonds and stocks CFF = Increase in Stock + Increase in Debt - Dividends Paid Example : Increase in Stock = 50K Increase in Debt = 200K Dividends Paid = 25K CFF = ___

PE

___ = Share Price/ Earnings-per-share Solve using the Gordon Growth Model __ reflects primarily the firms' GROWTH rate of earnings and dividends

Corporate

___ Finance: Focuses on financial decision making by a firm's management.

Dealer

___ Market : Does not require a physical location. Securities are bought and sold through a network of dealers that trade for themselves. NASDAQ, which is the second largest secondary market in the world, is an example of a ___ market.

Stock Bond

___ Trading : The new york stock exchange is just one of 13 auction markets for trading stocks ___ Trading : mostly executed in the dealer market. Investors call several dealers for competitive bids/offers for their bond securities

Agency

___ costs are defined as costs that are incurred when management does not act in the best interests of shareholders.

Gross

___ fixed assets represent the original cost of the fixed assets currently owned by the firm.

Capital

___ is a financial asset or the value of an asset.

Diversification idiosyncratic

___ is essentially spreading one's wealth across many assets to offset the possibility that a large negative return in one asset will destroy a large portion of an investor's wealth. The portion of risk that is diversifiable is considered ___ risk. (another name for unsystemic risk)

Banks

___ make money by paying depositors a smaller interest rate than the interest rate they charge to borrowers.

Auction New

___ market : A market with a physical location and where prices are determined by investors' willingness to pay. The ___ York Stock Exchange (NYSE) is the world's largest secondary financial market and is an example of an __ market.

Coupon

___ rate: The ___ rate is the interest rate of the bond, also known as the coupon yield.

Efficiency fair grow

___ requirements (for financial markets): Competitive : many buyers and sellers Liquid : can buy/sell quickly Transparent : Bid/Ask prices are visible Standardized : Standard security Why efficient markets are necessary: Market prices reflect "___ value" or "intrinsic value" Deviations from fair value are quickly eliminated Resources are efficiently allocated in the economy Efficient firms __ , risk, inefficient firms are restrained

Market

___ yield : The required yield for a bond - determined by investor trading in financial markets if bond yield is too low (i.e price too high), no buyers if bond yield is too high (i.e price too low), no sellers Supply & Demand forces a bond's yield to equal the "___ yield"

Accounting

____ : Backward Looking Measure past operations : Income Statement Based on "Historical Cost": Bonds at face value Subjective judgement: Depreciable life of an asset Accrual Accounting: Revenue/Expense recognized when "incurred"

Duration Risk

____ : The percentage drop in price caused by 1% increase in yield. What if interest rates rise by 1%? 5-year 4% semi-annual bond : Price drops from 1000 to 956 Price drops by 4.4%: Duration = 4.4 10-year 4% semi-annual bond: Price drops from 1000-922 Price drops by 7.8%: Duration = 7.8 Duration increases with the term to maturity. (5-year - 4.4, 10-year 7.8) Duration measures the market ___ of a bond.

Financial

____ Management : Forward Looking Focus: Executable future transactions Based on expected future cash flows Based on "current market values & yields" Math-based : Calculated value of cash flows

Accrual Matching

____ accounting : Accounting system based on recording accounts based on historical prices and the matching principle. ____ principle : Accrual accounting principle to match revenues and expenses in the same period.

Secondary stock

____ financial markets are where securities are traded after the initial offering. Said differently, the secondary market for stocks is commonly referred to as the ___ market.

Efficient

____ frontier : max return for given risk - diversified portfolios with no idiosyncratic risk

Primary

____ market : The financial market where securities (stocks and bonds) are first sold.

Investments

____: This area is devoted to understanding the various types of financial instruments—such as stocks, bonds, etc.—and how to value these instruments.

annuity ordinary

an ___ is defined as an equally spaced series of cash flows all of the same magnitude. That is, payments of $100 at time 1, time 2, and time 3 would be a three-period, $100-per-payment ___. An __ annuity entails cash flows at the end of the period.

due

annuities __ assume the payments come at the beginning of the period.

ratings

bond ___ begin at AAA (for the least risky bonds—those from the most financially solid companies) and end at D (for the most risky bonds).

Assets

capital budgeting analysis : The process of deciding which ___ to buy.