Baylor FIN 3310 Exam 1 Kim

Vocabulary practice flashcards covering fundamental definitions, corporate structures, market types, agency conflicts, and market efficiency concepts from the FIN 3310 lecture.

Finance

A broad academic field closely related to economics that centers on decision-making, valuing assets, and managing investments while accounting for the time value of money.

Corporate Finance

A branch of finance focused on asset acquisition and project launching (investment), capital raising (finance), and firm operations (management) to maximize value, dealing primarily with the demand side of capital markets.

Sole Proprietorship

An unincorporated business owned by one individual who receives single-rate tax treatment but faces unlimited liability and limited ability to raise capital.

General Partnership

A legal business arrangement between two or more individuals where all owners share unlimited liability for the business's debts and obligations.

Limited Partnership

A business partnership managed by general partners with unlimited liability, alongside passive limited partners whose liability is restricted to their investment amount.

Corporation

A legal entity separate from its owners that offers limited liability, infinite life, and liquid ownership, but subjects shareholders to double taxation and potential agency problems.

Goal of the Firm

To maximize owner wealth by maximizing the common stock price.

Intrinsic Value

The present value of an asset's expected future cash flows, discounted at the required rate of return based on cash flow amount, timing, and riskiness.

Agency Costs

Costs resulting from conflicts of interest between managers and shareholders, or between shareholders and bondholders.

Covenant

A clause included in bond agreements by bondholders to restrict managerial actions and limit the use of additional debt.

Direct Transfer

A method of transferring capital directly between small businesses and savers without passing through financial intermediaries or investment banks.

Sell Side

The role played by investment banks that underwrite or facilitate indirect transfers of capital and securities between corporations and savers.

Buy Side

The role played by financial intermediaries (such as banks, mutual funds, and pension funds) that aggregate dollars from savers to purchase financial securities.

Money Markets

Financial markets where short-term debt obligations with a maturity of less than one year (e.g., T-bills and commercial paper) are traded.

Capital Markets

Financial markets where long-term financial securities with a maturity of greater than one year (e.g., bonds and stocks) are traded.

Primary Market

A financial market where new issues of securities are sold for the first time, with cash proceeds directly going to the issuing corporation.

Secondary Market

A financial market where existing ('old') securities are traded among investors, without direct cash flow to the issuing firm.

Spot Market

A financial market where assets are bought or sold for immediate ('now') transaction and delivery.

Futures Market

A financial market where participants agree today on a price for a transaction that will occur at a specified future date.

Derivative Security

A financial contract (such as options or futures) whose value is derived from the price of an underlying asset, used to hedge risk or speculate.

Efficient Market Hypothesis (EMH)

The theory asserting that securities are normally in equilibrium and fairly priced, meaning investors cannot consistently beat the market except through luck or superior information.

Weak-form Efficiency

A level of market efficiency asserting that all historical market data and past price trends are fully reflected in stock prices.

Semistrong-form Efficiency

A level of market efficiency asserting that all publicly available information (such as news and financial reports) is fully reflected in stock prices.

Strong-form Efficiency

A level of market efficiency asserting that all information, including insider information, is fully embedded in stock prices.

Behavioral Finance

A field of study combining cognitive psychology with finance to explain how individual decisions and market behaviors deviate from traditional rationality.