Finance ALL TERMS

Finance

The study of how today's decisions affect tomorrow's outcomes, fundamentally involving the channeling of capital from savers to borrowers and allowing economic value to traverse time.

Financial System

The network of institutions, markets, and instruments that facilitates the movement of funds from surplus entities to deficit entities in an economy.

Savers

Entities with excess financial capital, typically households, businesses, and governments, who supply funds to the financial system.

Users (of funds)

Entities that have economic opportunities but lack sufficient capital, typically businesses and governments, who borrow or raise funds from the financial system.

Financial Markets

Platforms or venues where financial securities are traded, such as stock markets, debt markets, commodity markets, derivatives markets, and currency markets.

Financial Intermediaries

Specialized institutions (e.g., banks, mutual funds, brokers, insurance companies) that act as bridges between savers and users, facilitating financial transactions and addressing frictions.

Financial Securities

Tradable financial assets based on contractual agreements that give the buyer certain legal entitlements; used by businesses and governments to source funds.

Debt Issuance

The process of borrowing money by issuing debt securities (like bonds) with an obligation to repay the principal and interest.

Equity Issuance

The process of selling ownership stakes in a company by issuing equity securities (like stocks).

Stock (or Share)

A unit of ownership in a corporation. Stock refers to equity that is traded, while shares represent an equal amount of ownership.

Primary Market

The market where new financial securities are sold for the very first time by the issuing entity (business or government) to investors.

Secondary Market

The market where existing financial securities are traded between investors without involving the initial issuer.

Underwriting

The process, typically handled by investment banks in the primary market, of marketing and distributing newly issued securities to investors on behalf of the issuer.

Corporation

A type of business legal structure characterized by joint-stock ownership, corporate personhood (as a separate legal entity), and limited liability for shareholders.

Joint-Stock Ownership

A characteristic of corporations where ownership is divided into shares held jointly by shareholders who can buy and sell shares without affecting the company's existence.

Corporate Personhood

The legal status of a corporation as a separate entity with rights and obligations similar to those of a natural person (can own property, enter contracts, sue and be sued).

Limited Liability

A characteristic of corporations where shareholders' financial liability is limited to the value of their investment and they are not personally responsible for the corporation's obligations.

Corporate Governance

The system of rules, practices, and processes used to direct and manage a company, aiming to align the interests of management with those of shareholders and other stakeholders.

Separation of Ownership and Management

The structure in public corporations where shareholders are the owners but delegate the day-to-day operations to professional managers (executives).

Board of Directors

A group of individuals elected by shareholders to oversee the management of a corporation, set strategic direction, and represent shareholder interests.

Executives

Officers of a corporation (e.g., CEO, COO, CFO) responsible for the day-to-day management and implementation of the board's strategic vision.

Conflict of Interest

A situation where the personal interests of an individual (e.g., an executive) may conflict with their professional duties or the interests of others (e.g., shareholders).

Voting Rights

The rights of shareholders to vote on important corporate matters, such as electing directors and approving major actions.

Shareholder Proposals

Proposals submitted by shareholders for consideration at the company's annual meeting to influence corporate governance or practices.

Engagement and Activism

Actions taken by shareholders, particularly institutional investors, to directly interact with management or campaign for changes in leadership or strategy.

Proxy Fight

A contentious situation where shareholders attempt to gain control of the board of directors by soliciting proxy votes from other shareholders.

Super Voting Stock

A class of shares that grants disproportionately higher voting power per share compared to regular common stock, often creating a dual-class share structure.

CEO Duality

A governance structure where the Chief Executive Officer also serves as the Chairperson of the Board of Directors, concentrating power in a single individual.

Shareholder Value Maximization (Shareholder Primacy)

A perspective that the primary goal of corporate management should be to run the business in a way that maximizes the company's share price and shareholder wealth.

Corporate Social Responsibility (CSR)

A perspective that companies should be mindful of their impact on all stakeholders (employees, community, environment) in addition to shareholders.

Stakeholder Value

A concept aligned with CSR, emphasizing the importance of creating value for all stakeholders, not just shareholders.

ESG Investing

An investment approach that incorporates environmental, social, and governance factors into the investment decision-making process.

Annuity

A series of equal cash flows occurring at regular intervals over a specified period.

Compounding

The process of calculating the future value of a cash flow or series of cash flows by earning interest on both the initial principal and accumulated interest.

Compounding Frequency (m)

The number of times interest is compounded within a year.

Compound Interest

Interest earned on both the initial principal and the accumulated interest from previous periods.

Discounting

The process of calculating the present value of a future cash flow or series of cash flows by removing the time value of money.

Discount Rate

The rate used to translate a future cash flow into its present equivalent.

Future Value (FV)

The value of a cash flow or series of cash flows at a specific point in the future, assuming a certain interest rate or rate of return.

Inflation

A general increase in prices and decrease in the purchasing value of money.

Interest Rate (i)

The rate at which an initial amount grows or shrinks over time. When expressed as a percentage, it typically represents the annual rate unless otherwise stated.

Opportunity Cost

The potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Periodic Rate (i/m)

The interest rate applied per compounding period when compounding occurs more frequently than annually.

Perpetuity

An annuity in which the periodic payments continue indefinitely.

Present Value (PV)

The current worth of a future cash flow or series of cash flows, discounted back to today's terms using a specific rate of return.

Simple Interest

Interest earned only on the initial principal amount.

Time Preference

The natural human tendency to prefer immediate consumption or gratification (for example, $100 now) over delayed rewards (for example, $100 in one week).

Time Value of Money (TVM)

The principle that a dollar today is worth more than a dollar tomorrow due to its earning potential and the effects of inflation.

Timeline

A visual representation used in Time Value of Money calculations to illustrate the timing and amount of cash flows over a specified period.

Bond

A debt security issued by corporations or governments to raise capital, promising to repay the principal along with interest payments.

Coupon Rate

The annual interest rate stated on a bond, expressed as a percentage of the face value.

Face Value (Par Value)

The amount of money the bond issuer promises to repay the bondholder at maturity.

Yield to Maturity (YTM)

The total return an investor can expect to receive if they hold the bond until it matures, taking into account all coupon payments and the difference between the purchase price and face value.

Maturity Date

The date on which the bond issuer repays the face value to the bondholder.

Zero-Coupon Bond

A bond that does not pay periodic interest (coupon) payments. It is sold at a discount and matures at face value, with the investor's return being the difference between the purchase price and the face value.

Coupon Bond

A bond that pays periodic interest (coupon) payments at specified intervals (e.g., semi-annually) and returns the face value at maturity.

Primary Market

The market where new bonds are sold for the first time directly to investors.

Secondary Market

The market where previously issued bonds are traded between investors.

Money Market

A market for bonds with short-term maturities (one year or less).

Bond Market

A market for bonds with long-term maturities (more than one year).

Treasury Bills (T-Bills)

Short-term, zero-coupon bonds issued by the U.S. Treasury with maturities of one year or less.

Treasury Notes (T-Notes)

U.S. Treasury securities with maturities of 2 to 10 years.

Treasury Bonds (T-Bonds)

U.S. Treasury securities with maturities greater than 10 years.

Corporate Bonds

Bonds issued by corporations.

Municipal Bonds (Munis)

Bonds issued by state and local governments.

Asset-Backed Securities (ABS)

Bonds backed by a pool of loans (e.g., car payments, credit card payments).

Mortgage-Backed Securities (MBS)

Bonds backed by a pool of mortgage payments.

Interest Rate Risk

The risk that a bond's price will decline due to rising interest rates.

Default Risk

The risk that the bond issuer will fail to make timely payments of interest or principal.

Credit Rating

An assessment of the creditworthiness of a bond issuer, assigned by credit rating agencies like S&P, Moody's, and Fitch.

Credit Spread

The difference in yield between securities of similar maturity but different credit quality, typically using a Treasury security as the benchmark.

Duration

A measure of a bond's sensitivity to changes in interest rates.

Term Structure

The relationship between interest rates and time to maturity for bonds with similar credit quality.

Term Premium

The difference between the rates for long-maturity versus short-maturity bonds.

Yield Curve

A visual representation of the term structure, plotting the yields of bonds with similar credit quality against their maturities.

Normal Yield Curve

An upward-sloping yield curve, where longer-term bonds have higher yields than shorter-term bonds.

Flat Yield Curve

A yield curve where yields for bonds of all maturities are approximately the same.

Inverted Yield Curve

A downward-sloping yield curve, where short-term yields are higher than long-term yields.

Treasury Yield Spread

The difference in yields between two Treasury securities with different maturities.

Risk-Free Rate

Derived from short-term Treasury yields, as these securities are considered nearly default-free.

Risk Premium

Investors demand a risk premium when purchasing corporate bonds or other risky assets to compensate for both default risk and interest rate risk.

Buyback (Share Repurchase)

A company buys back its own shares from the market, reducing the number of shares outstanding and increasing the ownership percentage of remaining shareholders.

DCF (Discounted Cash Flow)

A valuation method that estimates the value of an investment based on its expected future cash flows, discounted back to their present value.

Dividends

Cash payments a company distributes to its stockholders out of its profits, typically paid quarterly but not obligatory.

EBIT

Earnings Before Interest and Taxes; a measure of a company's profitability before considering interest expenses and income taxes.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company's profitability before considering interest, taxes, depreciation, and amortization expenses.

Earnings Per Share (EPS)

A company's net income divided by the number of its shares outstanding, reflecting the amount of profit attributable to each share.

Equity

Ownership interest in a corporation, often represented by shares of stock.

Equity Value

The value of a company attributable to shareholders, calculated as Enterprise Value minus Debt plus Cash.

Enterprise Value (EV)

The total value of a company, including both equity and debt, representing the cost to acquire the entire business. EV = Equity + Debt - Cash.

Exit Multiple Method

A method for calculating terminal value in a DCF analysis by applying valuation multiples from comparable companies to the company's last forecasted cash flow.

FCFF (Free Cash Flow to the Firm)

The cash flow available to all investors in a company, including both debt and equity holders, after all operating expenses and investments have been paid.

Forward P/E

A valuation multiple that compares a company's stock price to its expected earnings per share for the next year.