Investment Terms and Concepts

A set of flashcards covering key vocabulary relevant to investment terms and concepts.

Higher Rates of Return

Investors demand higher returns on risky investments compared to safe ones.

Risk-Free Rate of Return

The expected return on an investment with no risk.

Risk Premium

The return over the risk-free rate that compensates investors for taking on additional risk.

Interest Rate

The compensation paid by the borrower of funds to the lender.

Required Return

The cost of funds typically applied to equity instruments like common stock.

Inflation

A rising trend in the prices of most goods and services.

Real Rate of Interest

The rate that balances supply and demand for investment funds without inflation.

Term Structure of Interest Rates

The relationship between bond maturity and rate of return.

Yield Curve

A graphic depiction of the term structure of interest rates.

Yield to Maturity (YTM)

The annual return on a debt security held to maturity.

Inverted Yield Curve

A downward-sloping yield curve indicating higher short-term interest rates.

Normal Yield Curve

An upward-sloping yield curve indicating higher long-term interest rates.

Flat Yield Curve

A yield curve showing little variation in interest rates across maturities.

Expectations Theory

The theory that the yield curve reflects investor expectations for future interest rates.

Liquidity Preference Theory

Suggests long-term rates are generally higher than short-term rates due to investor preferences.

Market Segmentation Theory

Suggests the loan market is segmented by maturity, affecting interest rates.

Corporate Bonds

Long-term debt instruments issued by a corporation that promises repayment under specific terms.

Coupon Interest Rate

The percentage of a bond's par value paid annually as interest.

Bond Indenture

A legal document that details bondholder rights and issuer duties.

Standard Provisions

Provisions in a bond indenture that do not strain financially sound businesses.

Restrictive Covenants

Provisions placing operating constraints on the borrower to protect bondholders.

Sinking-Fund Requirement

A provision ensuring systematic retirement of bonds before maturity.

Security Interest

Collateral pledged against a bond, ensuring its safety.

Trustee

An entity acting on behalf of bondholders to enforce indenture terms.

Impact of Bond Maturity

Long-term debt typically pays higher interest rates than short-term debt.

Impact of Offering Size

Larger bond offerings may reduce flotation costs, but increase default risk.

Impact of Issuer's Risk

Higher issuer risk results in higher interest rates for bonds.

Cost of Money

The basis for determining a bond's coupon interest rate.

Convertible Feature

Allows bondholders to convert bonds into a specified number of shares.

Call Feature

Allows issuers to repurchase bonds at a specified price before maturity.

Call Price

The price at which a bond can be repurchased using the call feature.

Call Premium

The amount above par value that a bond's call price may be.

Stock Purchase Warrants

Rights to buy a certain number of issuer’s shares at a set price.

Current Yield

Annual coupon payment divided by the current market price of the bond.

Yield to Call (YTC)

The yield calculated if the bond is called before maturity.

Premium Bond

A bond with a present value greater than its face value.

Discount Bond

A bond where the present value is less than its face value.

Par Bond

A bond where the present value equals its face value.

Risk

A measure of the uncertainty surrounding the return on an investment.

Total Rate of Return

The total gain or loss on an investment over a given period.

Portfolio

A collection of various assets held by an investor.

Risk Averse

Preferring lower risk investments with higher returns as compensation.

Risk Neutral

Choosing investments based solely on higher returns, regardless of risk.

Risk Seeking (Taker)

Preferring higher-risk investments even if they come with lower returns.

Scenario Analysis

An approach to assess risk using multiple potential outcomes.

Range

A measure of risk calculated by the difference between best and worst outcomes.

Probability Distribution

A model relating probabilities to potential outcomes of an asset.

Standard Deviation

A statistical measure of dispersion around an expected value.

Expected Value of Return

The average return an investment is anticipated to generate.

Normal Probability Distribution

A distribution shaped like a bell curve, symmetrical around the mean.

Coefficient of Variation

A relative measure of dispersion useful for comparing asset risks.

Efficient Portfolio

Maximizes return for a given level of risk.

Correlation

A statistical measure of relationships between two numerical series.

Positively Correlated

Two asset classes that move in the same direction.

Negatively Correlated

Two asset classes that move in opposite directions.

Correlation Coefficient

Indicates the strength and direction of a relationship between two series.

Perfectly Positively Correlated

Two series with a correlation coefficient of +1.

Perfectly Negatively Correlated

Two series with a correlation coefficient of -1.

Uncorrelated

Two series with close to zero correlation coefficient.

Diversification

The strategy of mixing different assets to reduce overall risk.

Total Risk

Combination of nondiversifiable and diversifiable risk.

Diversifiable Risk

Unsystematic risk that can be eliminated through diversification.

Nondiversifiable Risk

Systematic risk that cannot be eliminated through diversification.

Capital Asset Pricing Model (CAPM)

The theory linking risk and return for all assets.

Beta Coefficient (B)

A measure of an asset's nondiversifiable risk.

Market Return

The return expected from a portfolio of all traded securities.

Debt

All borrowings of a firm with a fixed repayment schedule.

Equity

Funds provided by a firm's owners that are repaid based on performance.

Voice in Management

Stockholders have voting rights that creditors do not possess.

Claim on Income and Assets

Creditors are prioritized over equityholders for claims on assets.

Maturity

Equity does not mature; repayment is not mandatory.

Privately Owned Stock

Common stock of firms that are not publicly traded.

Publicly Owned Stock

Common stock of firms available for public trading.

Closely Owned Stock

Common stock owned by a few investors or families.

Widely Owned Stock

Common stock owned by numerous unrelated individuals.

Par-Value Common Stock

The arbitrary value assigned for legal purposes in corporate charters.

Preemptive Right

Allows stockholders to maintain ownership percentage during new share issues.

Dilution of Ownership

Reduction in ownership percentage from new share issuance.

Dilution of Earnings

Decrease in earnings per share due to additional shares issued.

Rights

Instruments allowing stockholders to purchase shares at a discount.

Authorized Shares

Total shares a firm's charter allows it to issue.

Outstanding Shares

Shares currently held by investors.

Treasury Stock

Shares repurchased by the firm that are held in its treasury.

Issued Shares

Total shares that have been distributed to investors.

Preferred Stock

A class of stock with defined dividend rates, often prioritized.

Par-Value Preferred Stock

Preferred stock with a stated face value used for dividends.

No-Par Preferred Stock

Preferred stock without a specified face value.

Cumulative Preferred Stock

Preferred stock requiring unpaid dividends to be settled before common stock dividends.

Noncumulative Preferred Stock

Preferred stock without rights to unpaid dividends.

Callable Feature

Allows the issuer to retire preferred shares at a specific price.

Conversion Feature

Allows holders of preferred stock to convert to common stock.

Venture Capital

External equity funding for early-stage firms with growth potential.

Venture Capitalists

Businesses providing capital and oversight for startups.

Angel Capitalists

Wealthy individuals investing in early-stage companies in exchange for equity.

Initial Public Offering (IPO)

The first sale of a firm's stock to the public.

Prospectus

Part of a registration statement detailing an issue and issuer's financial position.

Investment Banker

A financial intermediary specializing in new security issues.

Underwriting

The risk-bearing role of investment bankers for new securities.

Underwriting Syndicate

A group of bankers sharing financial risk in underwriting.

Selling Group

Brokerage firms selling portions of new securities for a commission.