homework 4 ECON

capital market

capital is traded usually in stocks or bonds

credit market

capital is loaned and borrowed

purchasing power

currency’s usefulness measured by how much it can buy

financial planning process

figuring out how to get to where you want to be

financial advisors

to help with financial planning

liquidity

how easy to turn assets into cash

budget deficit

too little cash for wants and needs

budget surplus

income>expenses

sunk costs

past costs that can’t be recovered

capital gain

wealth from sold assets, buy at a lower price sell for a higher price

capital loss

wealth lost from sold assets, buy at a higher price sell for a lower price

equity

ownership in an asset entitling the holder to future gain or loss

debt

borrowed capital, a liability, a loan that must be repaid

interest

cost of debt expressed as an annual percentage of the principal

cost of debt

cost of borrowing capital because of having to pay interest

cost of equity

cost of having to share the benefits from the investment

principal

original amount of borrowed capital

risk

the probability the value of an asset may decline

diversification

spreading income and investments to reduce risk

transaction cost

cost of doing a deal that doesn’t contribute to the value of what’s being traded

discount rate

effect of time on value or rate at which time affects value

present value

liquid value or discounted value of future liquidity

future value

value of a present liquidity or projected series of cash flows in the future

annuity

a series of cash flows at periodic intervals

perpetuity

infinite annuity

independent event

happens by chance

expected value

weighted average result for an event

pro forma

income, cash flow, balance sheet