The actual rate paid (or received) after accounting for compounding that occurs during the year, i.e. it expressed as if it were compounded once per year
Term structure of interest rate
The relationship between interest rates and their terms to maturity
Interest rate risk
Is the risk that arises for bond holders from changes in market interest rates. The price sensitivity depends on the time to maturity and the coupon rate.
Debt due for repayment within a period of 12 months.
Sell goods or services to other businesses ‘on credit’.
An overdraft permits a company to run its current (cheque) account into
deficit up to an agreed limit.
Line of credit
Prearranged agreement with a bank that allows the firm to borrow up to a certain amount on a short-term basis
Accounts receivable (Factoring)
Factoring allows a company to raise funds by selling its accounts receivable on a continuing basis to a financier (called a factor) who is then responsible for managing the sales ledger and collecting the debts.
Active market in which large sums of money may be lent and borrowed for short periods.
involve the continual buying and selling of issued securities.
U.S. Treasury Bills
Issued by the U.S. Treasury. Original maturities of 13, 26 and 52 weeks. Generally sold in $10,000 denominations. Sold on a discount basis - at a discount from their face value. Difference between the face value and the purchase price is the interest earned by the investor.
Market for long-term securities with original maturity of more than one year. Securities may be of considerable risk.
A primary market is a market for newly created securities. The proceeds from the sale of securities in primary markets go to the issuing entity. A security trades only once in the primary market.
The current value of future cash flows from an investment
discounted at the appropriate discount rate.
The amount an investment is worth after one or more periods.
Risk is the degree of uncertainty associated with a future outcome. It is a chance of loss.
when investing in risky assets, reward is required by investors for bearing risk
Variance and standard deviation measure the volatility of asset returns. The variance and standard deviation describe the dispersion (spread) of the potential outcomes around the expected value.
Portfolio diversification is the investment in several different asset classes or sectors
The risk that can be eliminated by combining assets into a portfolio
There is a reward for bearing risk. There is not a reward for bearing risk unnecessarily. The expected return on a risky asset depends only on that asset’s systematic risk since unsystematic risk can be diversified away.
The capital asset pricing model (CAPM) defines the relationship between risk and return.
E(RA) = Rf + A(E(RM) – Rf)
Generation of investment proposals. Evaluation and selection of proposals (review and analysis). Decision-making and approval implementation.
Has an initial cash outflow, followed by one more expected future net cash inflows.
Project may have several net cash outflows and inflows.
The difference between the market value of a project and its cost
It is based entirely on the estimated cash flows and is independent of interest rates found elsewhere
The time it takes for the initial cash outlay on a project to be recovered from the project’s after-tax net cash flows.
Earnings (after depreciation and tax) from a project expressed as a percentage of the investment outlay.
Costs that have accrued in the past (irrelevant to a project)
Costs of lost options (relevant)
The cost of equity is the return required by equity investors given the risk of the cash flows from the firm.
Cost of debt
Required return on a company’s debt
The proportion of debt and equity funds employed in the company
refers to the extent to which a firm relies on debt
Optimal cost of capital
The time period between the acquisition of inventory and the collection of cash from receivables.
The time period between the outlay of cash for purchases and the collection of cash from receivables.
Speculative motive (Hold Cash)
the need to hold cash to take advantage of additional investment opportunities, such as bargain purchases.
The need to hold cash as a safety margin to act as a financial reserve.
The need to hold cash to satisfy normal disbursement and collection activities associated with a firm’s ongoing operations.
difference between cash balance recorded in the cash account and the cash balance recorded at the bank
lost sales from refusing credit. These costs go down when credit is granted.
the cash flows that must be incurred when credit is granted. They are positively related to the amount of credit extended.
a way of organising the manufacture of goods such as motor vehicles, engines and power tools.
A basic tool that sets out the relationship between these three elements, i.e. sales, net profit and costs, in the form of an easy-to-use mathematical equation or model that help managers know
-The sales volume, which will earn a desired level of net profit
-The costs, which may affect the projected sales and profit
those costs that move in direct relationship with volume because they remain constant per unit, and are expressed as dollars per unit
those costs that stay the same regardless of the volume of sales
those costs that have characteristics of both a variable and a fixed cost.
provides insight into the profit potential of a company
Margin of safety
the difference between output activity and the break-even activity level
is the relationship between contribution margin and the income from operations
cost items that are capable of being identified with, or
traced to, an activity or a product /service(i.e. a ‘cost object’)
items that cannot directly be related or identified with a
particular activity, or a product/service. Commonly known as overheads.
describes the way the full cost per unit of output is identified when the units output differ
the sum of the variable and fixed costs of pursuing some activity
a technique for more accurately relating overheads to specific production or provision of services
foreign exchange market
a global network of banks, brokers and foreign exchange dealers connected by electronic communications systems
purchasing power parity (PPP)
theory states that changes in exchange rates are influenced by the purchasing power of one currency vis-à-vis another.
Interest rate parity (IRP)
relative interest rates determine the relativity between the forward exchange rate and the spot exchange rate
holder makes a loss equal to the premium paid if the asset price on expiration is below the exercise price – the option expires worthless
holder makes a loss equal to the premium paid if the asset price on expiration is greater than the exercise price
currency option is the right - but not the obligation - to buy (in the case of a call) or sell (in the case of a put) a set amount of one currency for another at a predetermined price at a predetermined time in the future.