I-CORE FINANCE TERMS

Inflation

rate at which prices as a whole are increasing

Opportunity cost

if I have the money now, I can take advantage of current or future opportunities to spend that money

Risk

if you have the money now, you don't have to wait...and with waiting comes RISK

Future value

amount to which an investment will grow after earning interest

Compound interest

interest earned on interest

Simple interest

interest earned only on the original investment

Lump sum situation

when you have a single cash flow that must be evaluated at...or moved to...a different timepoint

Present value

value today of a future cash flow

Discount factor

present value of a $1 future payment

Discount rate

interest rate used to compute present values of future cash flows

Discounted cash flow

method of calculating present value by discounting future cash flows

Annuity

level stream of cash flows at regular intervals with a finite maturity

Perpetuity

an annuity that goes on forever

a stream of level cash payments that never ends

Applications

value of payments (for a bond investment)

implied interest rate for an annuity

calculation of periodic payments

Effective annual interest rate

interest rate that is annualized using compound interest

Annual percentage rate

interest rate that is annualized using simple interest

Nominal interest rate

rate at which money invested grows

Real interest rate

rate at which the purchasing power of an investment increases

Bond

security that obligates the issuer to make specified payments to the bondholder

Face Value (par value or principal value)

Payment at the maturity of the bond

Coupon

the interest payments made to the bondholder (occur semi-annually)

Coupon rate

annual interest payment, as a percentage of the bond's par or face value

Term Structure of Interest Rates

A listing of bond maturity dates and the interest rates that correspond with each date

Yield curve

plot of relationship between bond yields to maturity and time to maturity

graphical representation of the term structure of interest rates

Treasury strips

bonds that make a single payment

Default or credit risk

the risk that a bond or issuer may default on its bonds

Default premium

the additional yield on a bond that investors require for bearing credit risk

Investment grade

bonds rated by Baa or above by Moody's or BBB or above by Standard & Poor's

Junk bonds

bond with a rating below Baa or BBB

current yield

annual coupon payments divided by bond price

Yield to maturity

discount rate for which the present value of the bond's payments equals the price

Rate of return

Total income or loss per period per dollar invested

Primary market

market for the sale of new securities by corporations

Initial public offering (IPO)

first offering of stock to the general public

Primary offering

the corporation sells shares in the firm

common stock

ownership shares in a publicly held corporation

secondary market

market in which previously issued securities are traded among investors

dividend

periodic cash distribution from the firm to the shareholders

P/E ratio

Ratio of stock price to earnings per share

Bid price

the prices at which investors are willing to buy shares

Ask price

the prices at which current shareholders are willing to sell their shares

Going Concern Value

extra earning power

intangible assets

value of future investments

Book value

net worth of the firm according to the balance sheet

Liquidation value

net proceeds that could be realized by selling the firm's assets and paying off its creditors...often less than book value

Market value balance sheet

financial statement that uses market value of all assets and liabilities

stock valuation methods

valuation by comparables

intrinsic value

Valuation by comparables

financial statement ratios

market/competitor multiples

Intrinsic Value

present value of future cash payoffs from a stock or other security

dividend discount model

find the present value of all future dividend payments (cash flows)

expected return

the percentage yield 'r' that an investor forecasts from a specific investment over a set period of time

expected holding period return (HPR)

constant-growth DDM

a version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model)

Payout ratio

fraction of earnings paid out as dividends

Plowback ratio

fraction of earnings retained by the firm

Sustainable growth rate

the firm's growth rate if it plows back a constant fraction of earnings, maintains a constant return on equity, and keeps its debt ratio constant

Present Value of Growth Opportunities (PVGO)

Net present value of a firm's future investments