Ask price the price announced by the seller at which he is willing to sell a stock

Annual Fee An amount that credit card companies can charge for the use of a credit card.

Annual Percentage Rate (APR) Shows how much credit costs you on a yearly basis, expressed as a percentage.

Asset Anything of value that a business owns, such as cash, equipment, or a building.

Balance sheet A report of the final balance of all assets, liabilities, and owner's capital at the end of an accounting period.

Break-even point The point at which the money from product sales equals the costs of making and distributing the product.

Budget A formal, written statement of expected revenue and expected revenue and expenses for a future period.

Bank a financial institution that accepts deposits and channels the money into lending activities

Bank Reserves the currency banks hold in their vaults plus their deposits at the Federal Reserve

Blue Chip Stocks stocks of large, well-established corporations with a solid record of profitability

Board of Governors the seven-member board that oversees the Federal Reserve System

Bond a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money

bearer form the form of bond issue in which the bond is issued without record of the owners name; payment is made to whomever holds the bond

bid-ask spread the difference between the bid price and the asked price

Bid price price announced by the buyer at which he is willing to purchase a stock

Bond ratings measure default risk

Capital The buildings, equipment, tools, and other goods needed to produce a product or the money used to buy these items.

call premium the amount by which the call price exceeds the par value of the bond

call protected bond a bond that currently cannot be redeemed by the issuer

Call provision An agreement giving the corporation the option to repurchase the bond at a specific price prior to maturity

Capital Gains Yield g - dividend growth rate

clean price the price of a bond net of accreued interest

Collateral any asset pledged as security for debt payment.

Capital Gain the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller

Capital Loss Loss from the sale of an asset. (Capital loss can result when stock is sold for a lower price than was paid for it).

Credit An arrangement to receive cash, goods, or services now and pay for them in the future.

call premium the amount by which the call price exceeds the par value of the bond

call protected bond a bond that currently cannot be redeemed by the issuer

Call provision An agreement giving the corporation the option to repurchase the bond at a specific price prior to maturity

Capital Gains Yield g - dividend growth rate

clean price the price of a bond net of accreued interest

Collateral any asset pledged as security for debt payment.

Common Stock Rights Voting Rights Proxy voting classes of stock

Companies Dont pay dividends... Because they use their profits to grow their business

Constant dividend growth firm will increase the dividend by a constant percent every period

constant dividend (Zero Growth) firm will pay a constant dividend forever use perpetuity formula P0=D1/R R=D1/P0

Constant growth model price grows at the same rate as dividends

convertible bond can be swapped for a fixed number of shares of stock anytime before maturity at the bond holder's option

Coupon payment to coupon rate divide coupon payment by 1000

Coupon rate The annual coupon divided by the face value of the bond

Coupon Rate = 7% $1000 X 7% = $70

Coupons Stated interest payment made on a bond

current yield a bonds annual coupon divided by its price

Central Banking System A nation's central bank that is established to regulate the money supply and oversee the nation's banks. In the United States the Federal Reserve is the central bank.

Certificate of Deposit (CD) a savings alternative in which money is left on deposit for a stated period of time to earn a specific rate of return

Characteristics of Money Durability, portability, divisibility, uniformity, limited supply, and acceptability

Collateral a security pledged for the repayment of a loan

Commodities Market The market for the purchase and sale of commodity (a basic product, usually, but not always, agricultural or mineral) futures, contracts for the sale and delivery of commodities at some future time.

Compound Interest Interest earned on both the principal amount and any interest already earned.

Compounding the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future

Contractionary Fiscal Policy a decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap

Contractionary Monetary Policy the federal reserve's adjusting the money supply to increase interest rates to reduce inflation

Credit An arrangement to receive cash, goods, or services now and pay for them in the future.

Credit Card A plastic card used to make purchases now and pay for them later.

Credit Rating rating of the risk involved in lending to a specific person or business

Credit Union a nonprofit financial institution that is owned by its members and organized for their benefit

Crowding-Out occurs when a government deficit drives up the interest rate and leads to reduced investment spending

Currency the metal or paper medium of exchange that is presently used

Debit A bookkeeping entry on the left side of an account. It records the increase to an asset or an expense, OR the decrease of a liability or item of equity or revenue.

Debenture An unsecured debt usually with a maturity of 10 years or more

Debt creditors do not have voting rights

Debt excess debt can lead to bankruptcy

Debt interest is considered a cost of doing business

Debt not an ownership interest

Debt an amount owed to a person or organization for funds borrowed

Debt creditors have legal recourse if interest payments missed

Debt Fully Tax deductible

default risk premium the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

Deferred Call Provision a call provision prohibiting the company from redeeming the bond prior to a certain date

dirty price the price of a bond including accrued interest

Discount Bond Price below par

Discounting Future Amount the process of figuring out what that future value is in present-day money

Dividends Payments by corporation to shareholders; made in either cash or stock; Not tax deductible

Dividend Yield D1/P0 - stocks expected cash dividend divided by its current share price.

Debit Card a bank card that automatically deducts the amount of a purchase from the checking account of the cardholder

Deflation a contraction of economic activity resulting in a decline of prices

Demand Deposit the money in checking accounts

Discount Rate the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System

Dividend that part of the earnings of a corporation that is distributed to its shareholders

Easy-Money Policy monetary policy resulting in lower interest rates and greater access to credit; associated with an expansion of the money supply

Equity Amount of owners' or shareholders' portion of a business.

Equity dividends are not considered a cost of doing business

Equity common stockholders vote to elect board

Equity is the ownership interest of shareholders in a coporation in the form of common or preferred stock.

Equity an all equity firm cannot go bankrupt

Equity dividends are not a liability of firm until declared

Excess Reserves reserves that banks hold over and above the legal requirement

Expansionary Fiscal Policy An increase in government spending or a reduction in taxes

Expansionary Monetary Policy the federal reserve's increasing the money supply and decreasing interest rates to increase real GDP

Face Value The principal amount of the bond, repays at the end of the term of the bond

Feature benefits bond holder coupon rate will be lower

Feature benefits bond issuer coupon rate will be higher

Fisher Effect The relationship between nominal returns, real returns and inflation

(1+R)=(1+r)X(1+h)

Floating rate bonds coupon rates are adjustable

Fixed expense a consistent and regular cost of doing business such as rent or insurance.

Fair Credit Reporting Act federal law giving constumers right to veiw and correct their credit information

Federal Deposit Insurance Corporation (FDIC) A federal agency which insures bank deposits, created by the Glass-Strengall Banking Reform Act of 1933.

Federal Reserve the central bank of the United States

Finance Charge A fee for borrowing money, added to a monthly credit card bill.

Fiscal Policy a government policy for dealing with the budget (especially with taxation and borrowing)

Fractional Reserve Banking System A banking system in which banks keep less than 100 percent of deposits as reserves

Functions of Money Medium of exchange, unit of account, store of value

G increases stock price increases

Higher Interest Rate risk Long term bonds, lower coupon bonds

Income statement A financial report of the revenue, expenses, and net profit/loss for an accounting period.

Also know as the P&L statement for "profit and loss".

Initial Public Offering (IPO) the first time a company issues stock that may be bought by the general public

Invoice An itemized statement of money owed for goods shipped or services rendered.

Interest the price paid for the use of borrowed money

Interest Rate the percentage of a sum of money charged for its use

if bid price raises... the bid yield will decrease

If bond yield rises... the bond price will decline

if coupon rate makes semiannual payments calculate coupon payment and multiply by two.

if YTM>coupon rate par value (face value) >bond price (discount)

income bonds coupon payments are dependent on company income

Indenture the written agreement between the corporation and the lender detailing the terms of the debt issue

inflation premium the portion of a nominal interest rate that represents conpensation for expected future inflation

inside quotes the highest bid and ask quotes

interest rate risk premium the compensation investors demand for bearing interest rate risk

Investment Return The additional income earned from saving or investing money, often expressed as an annual percentage of the amount invested.

Liability A debt owed by a business.

Liquid Investment s assets that flow easily since they can be converted into other investments or cash without much time or difficulty

Liquidity being in cash or easily convertible to cash, the ease with which an asset can be converted into the economy's medium of exchange

liquidity premium the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity, or ability to sell bond quickly and receive actual value

long term bonds vs short term bonds long term bonds have more interest rate risk

lower coupon bonds vs higher coupon bonds lower coupon bonds have more interest rate risk

Lower Grade bonds higher rates of return

Lower interest rate risk short term bonds, higher coupon rate bonds

Markup The amount added to the cost of an item to cover expenses and ensure a profit.

Monetary Policy the setting of the money supply by policymakers in the central bank

Money the official currency issued by a government or national bank

Money Market Account is a savings account in which the interest rate varies from month to month

Money Market Mutual Fund (MMMF) interest-bearing accounts offered by investment companies, which pool depositor's funds for the purchase of short-term securties. Depositors can write checks in minimum amounts or more against their accounts

Money Supply the total stock of money in the economy

maturity date on which the principal amount of a bond is paid.

municipal securities interest received is tax exempt at the federal level

Net profit The amount remaining after expenses are deducted from sales revenue.

NASDAQ a nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically

New York Stock Exchange (NYSE) The largest securities exchange in the United States. After its 2007 merger with a large European exchange, it is formally known as NYSE Euronext.

Open Market Operations the buying and selling of government securities to alter the supply of money

Return on investment (ROI) The amount earned as a result of an investment.

Real Interest Rates the interest rate that is adjusted by subtracting expected changes in the price level (inflation) so that it more accurately reflects the true cost of borrowing

Required Reserves Reserves that a bank is legally required to hold, based on its checking account deposits

Rule of 72 The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

Stock a certificate documenting the shareholder's ownership in the corporation

Stock Market A system for buying and selling shares of companies

Three Cs of Credit Character Capacity Capital

Tight Money Policy monetary policy resulting in higher interest rates and restricted access to credit; associated with a contraction of the money supply

U.S. Savings Bonds small denomination bonds that are issued by the federal government at a discounted price and grow to full value over time.

Variable expenses an occasional cost of doing business that varies in amount from month to month.

Prestige pricing a technique in which higher-than-average prices are used to suggest status and prestige to the customer.

Price skimming a technique of charging high prices on a new product to recover costs, then dropped when the product is no longer unique.

Odd/even pricing A pricing technique in which odd-numbered prices are used to suggest bargains, such as $19.99.

Discount pricing A technique that offers a percentage-off discount such as 25% off

Bundle pricing A technique in which several complimentary products are sold for a single price, which is lower than the price would have been if each item was bought separately.

liquidity premium the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity, or ability to sell bond quickly and receive actual value

long term bonds vs short term bonds long term bonds have more interest rate risk

lower coupon bonds vs higher coupon bonds lower coupon bonds have more interest rate risk

Lower Grade bonds higher rates of return

Lower interest rate risk short term bonds, higher coupon rate bonds

maturity date on which the principal amount of a bond is paid.

municipal securities interest received is tax exempt at the federal level

Nominal rates rates of return that have not been adjusted for inflation

Note an unsecured debt usually with a maturity of under 10 years

NYSE broker

PMT and FV Same Sign, PV opposite sign

positive covenant specifies an action that the company agrees to do.

Preferred Stock Dividend Payments are fixed

Preferred stock does not generally carry voting rights

Preferred Stockholders Paid after the bond holders but before the common stockholders

Premium bond Price above par

Presence of a Sinking Fund bond issuer can repay the principal earlier than the stated maturity date

protective covenant a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender

proxy grant of authority by a shareholder allowing another individual to vot that shareholder's shares

put bond allows the holder to force the issuer to buy the bond back at a stated price

Rate of Return is the return obtained on an investment for a specific period of time, which is expressed as a percentage

Real interest rates rates of return that have been adjusted for inflation

registered form the form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record

Securities broker a person who brings buyers and sellers together

Securities Dealer a person who maintains an inventory of stock and ready to buy and sell that stock at any time

Seniority of a bond seniority of a bond means that if there is a default, the senior bond will get a preference over other bonds and creditors.

An account managed by the bond trustee for early bond redemption

Supernormal Growth (non constant growth) Dividend growth is not consistent, but settles down to constant growth eventually

taxability premium the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

Term Structure relationship between time to maturity and yields, does not include default risk premium

Total Return Dividend Yield + Capital Gains Yield

treasury yield curve a plot of the yields on treasury notes and bonds relative to maturity

US Treasury securities As interest rates fluctuate, the value of Treasury security fluctuates, not risk free ; generally considered to be free of default risk

Value of Stock present value of expected cash flows

Value of Stock the present value cash flows of all future dividend

When interest rates decrease, bond prices... Increase

When interest rates increase, bond prices... Decrease

When YTM = coupon rate... par value=bond price

Yield Curve graphical representation of term structure

Normal - upward sloping

Inverted - downward sloping

Yield to Maturity rate required in the market on a bond

YTM<coupon rate par value (face value) <bond price (premium)

zero coupon bonds a bond that makes no coupon payments and thus is initially priced at a deep discount

financial management The planning, organising and controlling of financial or monetary resources to achieve the goals of a business

profitability Objective: measured by deducting expenses from revenue and is reported in the income statement. Financial managers will balance cash flow and profit

liquidity Objective: the cash-flow position of a business - if a business can pay it's debts when they are due

efficiency Objective: greater efficiency reduces costs and increases profitability

solvency Objective: the ability to meet long-term financial obligations

growth Objective: growing involves taking risks and can cause cash flow issues

return on investment Objective: maximising the investor's return, so that they don't withdraw

short-term objectives Maximising profits or market share or liquidity

long-term objectives Growth, profitability and efficiency

owner's equity Internal Source: funds provided by the owner, cash from savings, sale of assets and borrowings which the owner is responsible for paying

retained profits Internal Source: the net profit

overdrafts External/Short-Term: an agreement with the bank that allows a business to overdraw it's cheque account, with a fee

bank bills External/Short-Term: a commercial bill is issued by a business to raid funds, the bill pays no interest but the investor gets a return equivalent to interest. The business pays a fee to the bank and reimburses it

promissory note External/Short-Term: similar to a commercial bill, but is issued on the name of the borrower and the bank takes no responsibility for it

factoring External/Short-Term: the selling of a company's accounts receivable to another company at a discount, for cash

leasing External/Long-Term: the business pays for the right to use an asset but does not own it

term loans External/Long-Term: are for 3-5 years with fixed payments and are secured with specific assets

mortgages External/Long-Term: usually long term over real estate, as value appreciates

debentures External/Long-Term: a type of loan that is secured by the assets of the issuing business. A security issued by large businesses or government agencies

unsecured notes External/Long-Term: similar to debentures but not secured by assets

ordinary shares Equity Source: the most common type of shares held by part owners of the company up to the value of their shares. Can be brought when the company floats on the stock exchange

rights issues Equity Source: allow current/existing shareholders the first opportunity to purchase a new issue of ordinary shares in proportion to their existing shares

share placements Equity Source: shares are offered at a discount to special investors or large institutional investors, which encourages potential investors

private equity Source: a way of financing a business by private investors purchasing all the shares in a business and then owning the business

banks Financial Institutions: the largest providers of investment funds

investment banks Financial Institutions: smaller than commercial banks and specialise in the provision of services to corporate clients. Three main functions include: investment management -> corporate financial advice -> money market dealings

finance and insurance companies Financial Institutions: finance companies raise funds through debenture issues and provide medium-term financing to companies and smaller businesses

superannuation funds Financial Institutions: occupy a growing area of the financial system because of the spread of private superannuation and compulsory employer superannuation. They are a major holder of shares

companies Financial Institutions: have the ability to raise finance themselves and can issue debentures and promissory notes and certain types of bonds

ASX Financial Institutions: the Australian Securities Exchange enables public companies, statutory corporations and governments to have access to a wider variety of funds

ASIC Government Influence: Australian Securities and Investment Commission is responsible for regulating business activities. Companies must lodge financial reports to ASIC and this government body can legally prosecute a company that breeches the law

company taxation Government Influence: has been reduced to 30% of profits. By having operations in a variety of countries, companies can make taxation services

economic outlook Global Market Influences: Australia is a capital-importing nations. GEO: Global Financial Crisis

availability of funds Global Market Influences: Australia is seen as a low risk country for investment and so has attracted high levels of foreign investment

currency fluctuations Global Market Influences: traders must decide in which currency a contract will be written. A spot contract means that when the transaction is made the prevailing exchange rate at that time is applicable

interest rates Global Market Influences: changes in interest rates can increase the costs of funds for a business who borrows from overseas, and can impact willingness and ability to purchase

financial needs Planning and Implementing: these include budgeting, planning, valuing assets, raising finance and monitoring the financial policies and procedures of the business

budgeting Planning and Implementing: developing financial forecasts and budgets that allow the business to budget for production, employment of human resources, raising appropriate funds from appropriate sources and budgeting for other operations

records and recording systems Planning and Implementing: developing accounting systems and ways of recording the expenses and revenues of the business as well as record keeping and financial accountability policies and procedures

financial controls Planning and Implementing: developing financial systems that allow the management to monitor and control both finances and operations, make decisions about operations and achieve the business's financial and business objectives

gearing or leverage the amount of debt to equity capital in a business or company, a leveraged or highly gear business is a greater risk when investing

debt financing Processes: the funding of a business through external or borrowed funds

equity financing Processes: the funding of a business through selling ordinary shares, or the amount of assets owned by a person within an enterprise. More expensive than debt financing because shareholders expect dividends

short-term finance Bank overdrafts, short-term loans, bills of exchange and acquired trade credit -> grants trade credit and helps purchase inventories

long-term finance Share capital, mortgage loan, long-term loan, debentures -> land, buildings, machinery and motor-vehicles

cash-flow statement Shows how much cash came into the business, how much cash was paid out, a cash flow forecast, can determine a businesses solvency

income statement Shows how much the business sold, how much it cost to sell and what profit was made. Also called a profit and loss or revenue statement. Indicates the level of profit and the operations that caused this

balance sheet Shows the assets owned and the liabilities owed, the contributions made by owners and how much the business is worth.

current ration Shows the liquidity (ability to pay current debts) of the business, and so the ratio should be more than one.

Current Assets/Current Liabilities

debt to equity ratio Shows the gearing (level of debt to equity) of a business. Should be about 1:1

Total Liabilities/Equity Funds

gross profit ratio Indicates what percentage of each sales dollar is gross profit, should be looked at in a trend and compared to competitors

Gross Profit/Sales

net profit ratio Measures the percentage of each dollar of sales that is left over to pay tax and returns to lenders and owners - the return on sales. Should never be negative.

Net Profit/Sales

gross profit Sales Revenue - Cost of Sales

return on equity ratio Measures the net profit before tax and compares that to the equity of a business, reflects asset and financial structure, measuring the owner's reward for the risks involved in keeping the business running

Net Profit/ Total Equity

expense ratio The proportion of expenses to sales, should be balanced.

Total Expenses / Revenue(Sales)

accounts receivable turnover ratio Measures how long a business takes to collect money from its creditors, should be a low number or equal to or less than the industry average

365/(Sales/Accounts Receivable)

comparative ratio analysis Ratio Business A/Ratio Business B

time comparisons Comparing information from the current period with previous periods to reveal a trend

industry average comparisons Comparing a businesses information with the industry average, available on the ASX, to locate their position amongst competitors

general business standards Used by analysts who research businesses. Commonly accepted benchmark standards apply to all businesses

normalised earnings Businesses sometimes report their annual earnings over a period of years and these normalised earnings are often adjusted for inflation, painting a falsely favourable impression

capitalising expenses Turns expenses into assets and may not represent the true financial condition of the business. This understates expenses and overstates profits and assets

valuing assets Overstating the value of assets to improve the appearance of their balance sheet

timing issues Financial statements represent the past performance of a business and carry no guarantee of future results

debt repayments A high level of gearing can represent a point of concern, however, higher levels of borrowed money can also bring future economic benefit when invested properly. Making comparisons between companies can therefore be difficult as some businesses and industries can safely carry high debt repayments while others can't

ethical issues related to financial reports Disclosure, best practice and following conventions and principles is important in the preparation of financial reports and is governed by ASX rules and managed by ASIC and CPA

distribution of payments Cash Flow Management: Planning for regular expenditure, some businesses plan to pay bills at the latest possible date

expenses minimisation and discounts for early payment Cash Flow Management: Most businesses purchase their supply needs on credit and pay by cheque on the due date, some obtain discounts for early payments - a reward for paying with cash or within a shorter timeframe

working capital formula = Current Assets - Current Liabilities

working capital Refers to the business's ability to meet its day to day financial needs. Aims to increase the efficiency with which a business uses its current assets and meets its current liabilities, there needs to be a balance between profitability and liquidity

successful management of working capital Minimise investment, relate working capital to sales levels and the cash flow cycle, make the most of working capital and balance current assets and liabilities

inventories Finished goods, Raw materials and Work-in-Progress inventories

lease-back Selling assets and then leasing them back from the purchaser helps to liquidate assets and raises finance without debt

fixed costs Remain the same no matter what the level of output

variable costs Change directly as output changes

cost centres Business units to which a business allocates costs

marketing objectives The marketing team works to generate revenue to fulfil the needs of the expenditures of a business, plus make a profit

sales mix Increase revenue by concentrating on selling particular products within the selling range, offering optional extras or special deals

pricing policy May be allowed to fluctuate, must take into account the costs of production, 'trade price' gives discounts to tradespeople and incentives include discounts and sales promotions

exchange rates Impact businesses that trade internationally, on where they produce and purchase and the price of their raw materials

overseas borrowing Direct Foreign Investment is where companies fun overseas subsidiaries by direct establishment or by taking over existing companies

Portfolio Investment is where as business borrows funds from overseas investors but retains control over their business

payment in advance Telegraphic transfer of funds through a bank on acceptance of order. Preferable to the exporter but not to the buyer unless goods are urgently required

clean payment The buyer remits payment for the goods through a bank when the goods are received. The exporter loses control of the goods and relies on the credit standing of the buyer to make payment

letters of credit The irrevocable documentary credit of any overseas bank confirmed by an Australian bank. LC = Letter of Credit, ILC = Irrevocable Letter of Credit, and Confirmed ILC

bill of exchange Documentary Sight, the exporter retains control of the goods until the payment is received

Documentary Term, the bill is accepted by the buyer and the documents are released to them. Exporter loses control, relies on buyer's credit standing and integrity

hedging Entering into a contract to buy/sell foreign exchange at a set date and a specified rate to reduce financial risk

derivatives Investment instruments that derive their value from a potential further return, e.g. the futures market. Based on the sales of securities, valued by tangible securities such as shares, bonds and commodities