U3: Fundamental Financial Principles

These flashcards cover key vocabulary terms and definitions related to fundamental financial principles, including interest rates, risk management, and the time value of money.

Interest Rate

The cost of borrowing money or the return on invested capital, expressed as a percentage.

Simple Interest

Interest calculated only on the principal amount, or on that portion of the principal amount which remains unpaid.

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

Risk Premium

The return in excess of the risk-free rate of return that investors require as compensation for the risk of a particular investment.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Nominal Interest Rate

The stated interest rate on a loan or financial product, not adjusted for inflation.

Real Interest Rate

The interest rate that has been adjusted to remove the effects of inflation.

Time Value of Money (TVM)

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Present Value (PV)

The current value of a future sum of money discounted at the specified interest rate.

Future Value (FV)

The value of a current asset at a specified date in the future based on an assumed rate of growth.

Annuity

A series of equal payments made at regular intervals over a specified period.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio.

Required Return

The minimum return an investor expects to achieve by investing in a particular asset.

Holding Period Return (HPR)

The total return received from holding an asset or portfolio of assets over a specified period.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Break Even

The point at which total revenues equal total costs; no profit, no loss.

Risk Management

The process of identifying, assessing, and controlling threats to an organization's capital and earnings.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values; used to assess risk in finance.