Definitions

Question 1

Maturity date

Answer 1

The date at which the principal amount of debt is repaid

Question 2

Uncovered interest parity

Answer 2

Attempting to forecast future spot rates using the currency interest rates. No locked future rate

Question 3

Require rate of return = cost of capital

Answer 3

The company’s estimate of the returns it needs to generate for potential providers of investment funds

Question 4

Par value

Answer 4

Nominal value

Question 5

Options

Answer 5

Allow you, for a premium fee, to take advantage of favourable movement of the market by buying or selling the asset at a fixed rate

Question 6

Capitalised value/stock market value of a company

Answer 6

Current market price of a company’s listed share X number of shares

Question 7

Forward rate/buy

Answer 7

Rate/price agreed today for delivery at an agreed future date

Question 8

Internal rate of return

Answer 8

The discount rate at which the NPV of a project is equal to 0

Question 9

Portfolio

Answer 9

A collection of assets

Question 10

Dividend

Answer 10

A return to shareholders on the amount paid to the corporation

Question 11

Dividend irrelevance hypothesis

Answer 11

Hypothesis where a pattern of dividends is irrelevant to the value of shares

Question 12

Covariance

Answer 12

The measure indicating the extent to which two securities change in tandem

Question 13

Ordinary shares

Answer 13

The fundamental ownership units of a corporation

Question 14

Covered interest rate parity in an arbitrage relation

Answer 14

There isn’t enough of a difference in rates to make a profit therefore it eliminates risk

Question 15

K

B

Answer 15

Cost to the company of providing that require rate of return

Question 16

Real interest rate

Answer 16

Cash flows as if they are going to happen to today; inflation stripped out

Question 17

Bid-offer spread

Answer 17

Dealer buys currency at bid rate. Sells it at an offer rate

Question 18

Business risk

Answer 18

Risk faced by all equity-holders

Question 19

Future contracts

Answer 19

Using a predetermined fixed rate of exchange

Question 20

Average rate of return

Answer 20

Average profit/ average investment

Question 21

Cum div

Answer 21

Dividend is just about to be paid (entitled to a div)

Question 22

Correlation

Answer 22

A measure indicating how strongly two securities are related

Question 23

Hedging

Answer 23

A process where a company tries to avoid potential exposure to any risk

Question 24

FTSE 100

Answer 24

Financial Times stock exchange (not well diversified)

Question 25

Risk averse

Answer 25

Someone who is reluctant to take risk and will avoid unnecessary risk

Question 26

Expected return

Answer 26

The return an individual expects a security to earn over a period

Question 27

Opportunity cost of capital

Answer 27

The expected rate of return offered by the other assets with the same risk as the project being evaluated

Question 28

Risk premium

Answer 28

Extra return earned over the risk-free rate

Question 29

Beta of a security

Answer 29

How sensitive asset i’s returns are to fluctuations in the market’s returns

Question 30

Financial risk

Answer 30

Risk faced by all equity-holders in a geared firm

Question 31

Arbitrage

Answer 31

The simultaneous purchase and sale of an asset to profit from a difference in price

Question 32

Basis

Answer 32

Difference between futures prices and spot price

Question 33

Discount rate

Answer 33

The interest rate used in discounted cash flow analysis to determine the present value of future cash flows

Question 34

Spot rate/price

Answer 34

A Rate/price agreed today for delivery (completion of contract) today

Question 35

Payback period

Answer 35

A period of time in a project found by counting the number of years it takes before the cumulative forecasted cash flow equals the initial investment

Question 36

Efficient market

Answer 36

One in which asset prices rapidly incorporate all relevant information

Question 37

Write

Answer 37

To sell a derivatives contract

Question 38

Risk

Answer 38

Variability (std dev) is returns

Question 39

Derivatives

Answer 39

Securities whose value is derived on the value of something else (the underlying)

Question 40

Capital Asset Price Model | CAPM

Answer 40

Shows how the expected return on an asset is related to its beta

Question 41

Book value/total equity

Answer 41

The total amount contributed to the corporation by equity investors

Question 42

Nominal interest/ money interest

Answer 42

Cash flows that will actually happen, taking into account any inflation

Question 43

Ex div

Answer 43

Div has just been paid

Question 44

The market

Answer 44

Strictly, all risky assets, in proportion to their values

Question 45

Efficient Frontier

Answer 45

All possible combinations of expected return and std dev in a given portfolio