CFA Level 1 Key Terminology Flashcards

A comprehensive set of vocabulary flashcards covering essential terms and definitions for CFA Level 1.

Abandonment option

The option to terminate an investment at some future time if the financial results are disappointing.

Accredited investors

Investors that meet certain minimum regulatory net worth or other requirements in order to invest in certain types of alternative assets.

Add-on pricing

A pricing approach based on high-margin optional features, customizations, and additional content.

Ad hoc committee

A small group of lenders or bondholders who negotiate with an issuer on debt restructuring and refinancing before the issuer submits a final proposal to the wider group of all lenders and bondholders.

Agency costs

Direct and indirect costs borne by the principal in a principal-agent relationship owing primarily to information asymmetries. Includes monitoring costs and missed opportunities.

Amortization

Allocation of the cost of intangible long-term assets to accounting periods; also allocation of bond premium or discount until maturity.

Annual general meeting (AGM)

Yearly meeting of corporate directors and shareholders to vote on directors, compensation, resolutions, and other matters.

Asymmetric information

Information imbalance between corporate insiders and outsiders regarding performance and prospects.

Auction/reverse auction models

Pricing models that establish prices through bidding (by buyers or sellers in reverse auctions).

Board of directors

Group selected by shareholders to manage a company, oversee management, and make strategic decisions.

Bondholders

Investors in securitized debt claims such as notes and bonds.

Bond indenture

Legal document between bond issuer and investors outlining rights and responsibilities.

Bundling

Pricing approach combining multiple products or services to encourage joint purchase.

Businesses

Organizational entities formed to provide returns or economic benefits to investors and owners.

Business model

Concise description of how a business earns revenues and profits through products, services, customers, and pricing.

Capital allocation

Process companies use for decision-making on long-term capital investments.

Capital-intensive businesses

Businesses characterized by high capital expenditures relative to sales and low asset turnover.

Capital investments

Expenditure for an asset or resource with useful life over one year.

Capital-light businesses

Businesses with high asset turnover, low capital expenditures relative to sales, and low working capital needs.

Capital structure

Mix of debt and equity financing used by a company.

Cash conversion cycle

Time between paying suppliers in cash and receiving cash from customers.

Cash flow from operations

Cash generated from a company’s primary business activities.

Cash ratio

Liquidity ratio: cash and marketable securities ÷ current liabilities.

Channels

Venues where a company markets or delivers products and services.

Commodities

Standardized products indistinguishable from competitors’ offerings.

Commodity producers

Firms that make and/or sell commodities.

Companies

Organizational entities providing returns or benefits to investors.

Contract manufacturers

Companies making products for others under specified terms.

Controlling shareholder

Individual or entity holding majority voting rights in a corporation.

Convertible debt

Debt that can be exchanged for common shares at a predetermined price.

Corporate issuers

Corporations seeking financing through debt or equity issuance.

Corporations

Legal entities, often public, that issue shares and debt.

Cost of capital

Required rate of return on capital used to finance a company.

Cost of debt

Required return on debt financing such as loans or bonds.

Cost of equity

Return required by equity investors to compensate for time value and risk.

Crowdsourcing

Business model where users contribute directly to product, service, or content creation.

Current ratio

Liquidity ratio: current assets ÷ current liabilities.

Days of inventory on hand (DOH)

Average number of days to sell inventory on hand.

Days payable outstanding (DPO)

Average number of days to pay suppliers.

Days sales outstanding (DSO)

Average number of days to collect receivables.

Debt

Obligation to pay cash, stock, or other assets at a future date.

Debt tax shield

Tax benefit from deductibility of interest payments.

Depreciation

Allocation of tangible long-lived asset cost to periods of benefit.

Differentiated products

Products distinguishable from competitors’ offerings.

Dilution

Increase in shares outstanding that reduces existing ownership percentages.

Direct listing

Public offering of shares without underwriters.

Direct sales

Selling products or services directly to customers without intermediaries.

Dividends

Distribution of profits or assets to shareholders.

Double taxation

Income taxed twice, e.g., corporate profits and shareholder dividends.

Drag on liquidity

Action or event that reduces available funds or delays inflows.

Dual-class structure

Capital structure with multiple equity share classes and unequal voting rights.

Dynamic pricing

Pricing strategy charging different prices at different times.

Employee stock ownership plan (ESOP)

Employee benefit plan granting ownership interest via company shares.

Equity

Ownership interest in an entity; residual claim after debt.

Exchange

Open, rules-based market for trading financial instruments.

Exercise

Act of executing the right under an option.

Extraordinary general meetings (EGMs)

Shareholder meetings outside of AGMs for urgent matters.

Financial leverage

Use of debt in capital structure, measured by ratios such as debt-to-equity.

Franchising

Business model where owner licenses asset and IP to third-party operator for royalties.

Free cash flow

Cash available to investors after necessary reinvestments.

Free cash flow hypothesis

Suggests higher debt levels discipline managers by limiting free cash flow.

Free float

Portion of equity not held by insiders or strategic investors.

Freemium business model

Pricing model offering free basic services with paid premium features.

General partners (GPs)

Private fund managers who deploy capital and return proceeds to investors.

General partnership

Business owned entirely by general partners.

Growth option

Option to make additional investments in a project if results are strong.

Hidden revenue business model

Business models offering free services to users while earning revenues elsewhere.

Hostile takeover

Acquisition attempt against the wishes of the target company’s board.

Human capital

Present value of an individual’s expected future labor income.

Hurdle rate

Minimum return required before general partners receive carried interest.

Independent directors

Board members with no material relationship to the company.

Initial public offering (IPO)

First sale of common shares to the public by a private corporation.

Inside directors

Board members who are employees, founders, or closely tied to the company.

Internal rate of return (IRR)

Discount rate that makes NPV of cash flows equal to zero.

Licensing arrangements

Rights to produce a product or access intangible assets using someone else’s brand name in return for a royalty.

Limited company

Business organizational form owned by shareholders with limited liability and an elected board.

Limited liability partnership (LLP)

A business organizational form owned entirely by limited partners with limited liability.

Limited partnership

Closed-end ownership form often used in private market funds with capital managed by a general partner.

Limited partners (LPs)

Outside investors in a private market fund who commit capital managed by a general partner.

Liquidity

A company’s ability to meet short-term obligations with cash or readily convertible assets.

Maintenance capital expenditures

Investments to keep assets in operation or improve efficiency without extending life.

Match funding

Financing an asset with a source aligned with its attributes, such as duration.

Material (Materiality)

Information that is decision-useful for a reasonable investor.

Minority shareholder

Owns less than a majority of a corporation’s voting rights.

Negative externalities

Costs imposed on third parties from production or consumption.

Net present value (NPV)

Present value of cash inflows minus present value of cash outflows.

Network effects

A model where user participation increases value of a product or service.

Net working capital

Working capital excluding short-term items unrelated to operations.

Omnichannel

Selling products or services through multiple channels (store, online, etc.).

Operating cycle

Time between acquiring goods/raw materials and collecting cash from sales.

Operating leverage

Sensitivity of operating profit to revenue changes.

Optimal capital structure

Capital structure at which company value is maximized.

Organizational form

Legal/tax classification determining identity, liability, taxation, and financing.

Pass-through businesses

Businesses where income is passed to owners for taxation, not taxed at entity level.

Pecking order theory

Theory that managers prefer internal financing over debt, and debt over equity.

Penetration pricing

Discount pricing to build scale and market share.

Pet projects

Non-economically justified investments pursued by management for personal motives.

Physical risks

Economic/financial losses from climate-related extreme weather events.

Poison pill

Hostile takeover defense allowing shareholders to buy discounted shares, diluting bidder.

Price discrimination

Charging different prices based on customers’ willingness to pay.