A

Accelerated depreciation

A method of depreciation that results in greater depreciation expenses in the earlier years of an asset's life.

Accounting profit

The difference between revenues and expenses of a business enterprise, determined according to a set of accounting principles (e.g., in the U.S., accounting profit is determined according to generally accepted accounting principles, GAAP).

Accounts payable

Amounts due to suppliers for goods or services purchased on credit.

Accounts receivable

Amounts due from customers arising from the extension of trade credit.

Accounts receivable turnover

The ratio of net credit sales to accounts receivables; a measure of the number of times in a period that credit sales have been created and collected.

Accumulated depreciation

The sum of depreciation taken for physical assets in the firm's possession.

Activity ratio

A ratio that relates information on a firm's ability to manage its resources efficiently.

Addition paid-in capital

An amount paid for shares of stock in excess of the par or stated value of the shares.

Add-on interest

An interest arrangement in which interest is added to the loaned amount, and the principal (amount borrowed) and interest are repaid in equal, periodic payments.

Adjustable rate mortgage

A loan, secured by real estate, with an interest rate that varies according to some other, specified rate.

Agency relationship

A relation between two parties in which one party (the agent) is authorized by the other party (the principal) to make decisions or take actions for the benefit of the authorizing party.

Agent

A person authorized by another person (the principal) to act for him.

Amortized

A present value that has been transformed into an equivalent series of cash flows considering the time value of money.

Annualized rate

A rate of interest stated on an annual basis (i.e., as a rate per year).

Annual percentage rate, APR

A standard for reporting interest rates, in accordance to the Truth in Lending Act, that results in a simplified manner of annualizing and comparing rates. The interest rate per compound period is multiplied by the number of compound periods in a year, producing an annualized rate of interest.

Annual percentage yield, APY

An annualized rate that considers the effects of compounding with the year. See also EAR.

Annuity

A series of even cash flows that occur at even intervals of time.

Annuity due

A series of periodic, even cash flows in which the first cash flow occurs today.

APR

See annual percentage rate.

Arbitrage

The process of buying and selling identical assets in different markets at different prices until the asset have the same price everywhere.

Arbitrage Pricing Model

A model of asset prices that states that the expected return on an asset is the sum of the risk free rate and the expected return associated with unanticipated factors.

Arbitrage Pricing Theory

An asset pricing theory developed by Stephen Ross that is based on the idea that identical assets in different markets should be priced identically.

Articles of incorporation

A document that is filed with the state by a business entity that seeks incorporation; the document describes the business and the rights and responsibilities of its owners.

Asset

Property, either real, personal, tangible, or intangible.

Asset-backed security

A security created by pooling together assets (e.g., home mortgages, credit card accounts receivable) and selling interests in these assets.

Assumable mortgage

A mortgage that allows the borrower to sell the property to another party and this party assumes the debt obligation.

Average tax rate

The average rate of tax on a dollar of taxable income, calculated as the ratio of taxes to taxable income. The tax rate paid, on average, per dollar of taxable income.

B

Balance sheet

A statement of assets, liabilities, and net worth at a point in time. Also referred to as the statement of financial position.

Basic earnings per share (Basic EPS)

Net income, less preferred dividends, divided by the number of shares of stock outstanding.

Basic earning power ratio

The ratio of a firm's operating income to its total assets; a measure of the return on a firm's investment in assets.

Beta

A measure of the sensitivity of an asset's returns to the changes in the returns on the market portfolio.

Blind trust

A trust in which the grantor has no influence or information regarding the decisions of the trustee.

Board of directors

The governing body of a corporation that is elected by and makes decisions in the interest of the corporation's owners.

Bond

An agreement between a lender (the issuer) and a borrower(the investor).

Book value of equity

The value of the ownership interest in a company according to the accounting conventions applied; the sum of the par value of equity, additional paid in capital, retained earnings, less treasury stock.

Book value of equity per share

The ratio of the book value of shareholders' equity to the number of shares of stock outstanding.

Bond

A debt obligation in which the borrower promises to repay the amount of the borrowed loan at a specified point of time in the future, plus (if agreed upon) pay interest on the borrowed funds.

Bonding costs

Costs incurred by an agent in an agency relationship to ensure that he/she will act in the best intersts of the principals.

Bonds and notes

Promises to repay borrowed funds and to make periodic interest payments.

Budget

A written plan that organizes actual and projected cash inflows and outflows over a period of time.

Budgeting

The process of organizing, projecting, monitoring and controlling future cash inflows and outflows.

Business cycle

Economic activity that spans temporary phases of activity of expansion, recession and recovery, producing a wave-like pattern of economic activity.

Business risk

The uncertainty associated with the operating cash flows of business enterprise.

Bylaws

The rules of governance of an organization; for a corporation, the bylaws (along with the articles of incorporation) become part of its corporate charter.

C

Call risk

The uncertainty regarding whether a callable security (e.g., callable bond) will be called (i.e., purchased) from the investor by the issuer.

Capital

A firm's resources; funds raised from long-term sources, such as bonds and stocks.

Capital asset pricing model, CAPM

A theory of how assets are priced, where the expected return on an asset is the sum of the risk free rate of interest and a premium for bearing market risk.

Capital budgeting

The process of identifying and selecting investments in long-lived assets.

Capital gain

A gain (profit) on the sale of an asset used in business, which may receive preferential tax treatment through an exclusion of a portion of the gain from taxation or simply from a lower tax rate.

Capitalization rate

The discount rate that translates a future series of cash flows into a present value.

Capital lease

A rental obligation that is considered a long-term debt.

Capital market line

The preferred set of portfolios for risk averse investors that are a combination of the optimal portfolio (i.e., market portfolio) and either borrowing or lending opportunities.

Capital rationing

A situation in which there is a limit on the amount of spending on long-term investment projects.

Capital recovery period

See payback period

Cash flow from financing activities

Cash flows arising from the issuance, retirement, or repurchase of debt and equity securities.

Cash flow from investing activities

Cash flows related to the purchase or sale of physical assets.

Cash flow from operating activities

Cash flows of the firm arising from day-to-day operations.

Cash flow interest coverage ratio

The ratio of a firm's cash flow available to pay interest to its interest expense; a measure of a firm's use of financial leverage.

Cash flow risk

The uncertainty associated with the amount and timing of future cash flows from an investment.

Cash flow statement

A summary of cash inflows and outflows. For an individual using the cash basis of accounting, this statement is a summary of income (i.e., cash inflows) and expenses (i.e., cash outflows) during a period of time (e.g., a year). Also referred to as the income and expenditures statement and the income statement.

Certified Financial Planner Board

A non-profit professional regulatory organization that regulates financial planners by means of the trademark law, licensing individuals who meet its certification requirements to use the registered CFP marks.

Commercial bank

A corporation that is chartered under federal and state regulations to provide financial services to both individual and business customers.

Common stock

The residual (last-in-line) ownership of a corporation, represented by shares of stock.

Common-size analysis

The study of financial statements that have been restated such that each item is reported as a percentage of a base, where the base for the balance sheet is total assets and the base for the income statement is sales revenues.

Community property

Property owned by both parties to a marriage. In states with community property laws, any property acquired after marriage becomes community property.

Compounding

Translating a value today into a future value, considering that interest is earned on interest.

Compound interest

The payment of interest both on the principal amount and accumulated, earned interest.

Consensus forecast

A measure of the forecasts about a particular item, such as gross domestic product or a company's earnings; in the case of analysts' earnings forecasts, the average of the available forecasts is often used as the consensus forecast.

Consumer credit

Debt that is created when consumers are given an extenstion in the time to pay for goods or services.

Consumer price index (CPI)

A measure of prices or the cost of living published by the Bureau of Labor Statistics of the U.S. Department of Labor. The index is constructed to track the price level of a group of goods and services.

Consumer Credit Protection Act

See Truth in Lending Act

Continuous compounding

An arrangement in which interest paid on interest such that the compounding period is the smallest unit of time possible; compounding in which there are an infinite number of compounding peiods.

Conventional mortgage

A loan, secured by a home, that has a fixed interest rate and is typically not insured or guarenteed by a governmental agency.

Convertible security

A bond or stock that can be exchanged for another security of the issuer.

Corporation

A business entity created by law that is capable of entering into contracts, incurring liabilities and carrying out business.

Correlation

Association of two variables.

Correlation coefficient

A statistical measure of the association between two variables that is bounded by -1 (perfect negative correlation) and +1 (perfect positive correlation); the ratio of the covariance between two variables to the product of the standard deviations of the two variables.

Cost of capital

The cost of funds to a business enterprise, usually stated in percentage terms; the weighted average of the cost of debt and equity of a firm.

Coupon

The interest on a debt.

Coupon rate

The annual interest on an interest-bearing debt obligation, expressed as a percentage of the security's face value.

Covariance

A statistical measure of the association between two variables.

Coverage ratio

A measure of a firm's ability to satisfy particular obligations (e.g., current ratio is a measure of a firm's ability to satisfy its current liabilities).

Credit risk

The uncertainty regarding the timely payment of amounts owed.

Credit union

A non-profit cooperative that pools depositors' (members') funds and make loans to members. Members have a common bond (e.g., same employer).

Cross-over rate

The discount rate at which the net present values of two projects are equal; the internal rate of return of the differences in the cash flows of two projects.

Currency risk

The uncertainty associated with changes in the relative value of currencies.

Current asset

An asset that can reasonbly be expected to be liquidated (i.e., turned into cash) within one operating cycle (which is usually one year).

Current liability

A debt obligation that is due within one year.

Current ratio

The ratio of a firm's current assets to its current liabilities; a coverage ratio.