“Chapter 5: Interest Rate”

1) Interest rate: it is basically the cost of borrowing money that fluctuates over
time. It is a key tool for finance managers.

2) Annual Percentage Rate (APR): yearly percentage rate earned by investing

or charge for borrowing. It is considered the most common rate quoted.

3) Compounding period per year: frequency of times at which these

institutions add interest to an account each year.

4) Periodic interest rate (C/Y): rate that calculated by dividing the APR with
the number of compounding periods per year.

5) Effective Annual Rate (EAR): is the true rate of return to the lender and true
cost of borrowing to the borrower. It is also known as the Annual Percentage
Yield (APY).

6) Nominal interest rate: rate at which money invested grows.

7) Real interest rate: rate at which the purchasing power of an investment

increases.

8) Inflation: rate at which prices as a whole are increasing.

9) Risk free rate: theoretical interest rate at which an investor is guaranteed to

earn the subscribed rate and at which the borrower will never default.

10) Default premium: the portion of interest rate that is compensated for the
higher risk associated and the probability that a borrower will default.

11) Maturity premium: the portion of nominal interest rate that compensates
the inventor for the additional waiting time or the lender for the additional
time to take to receive repayment in full.

12) Yield curve: curve that shows the relationship of the interest rate to the
maturity date of a particular financial instrument.
 “Chapter 6: Bonds and Bond Valuation”

1) Bond: a long-term debt instrument which create a liability claim where one
party agrees to pay back the funds with interest on specific date in future. It is
a promissory note issued by an organization.

2) Par value: the amount that will be repaid when the bond finishes. Also
known as “the bond principal”.

3) Maturity date: the date when the bond principal will be paid (the bond
finishes).

4) Coupon: the fixed amount of interest paid to the holder of the bond (usually
semi-annually).

5) Coupon rate: the initial rate of return when the bond was first issued. It uses
coupon and initial par value.

6) Current yield: the yield assuming that buying the bond today. It uses coupon
and current market price.

7) Yield to Maturity (YTM): the final return that includes any change in future
bond price, whether profit or loss, so that it converges to the par value. It uses
coupon, current market price, and years to maturity.

8) Zero-coupon bond: a debt bond that doesn’t pay interest but making a
profit through a deep discount, when the bond is redeemed for its full-face
value.

“Chapter 7: Stock and Stock Valuation”

1) Ownership: share in the residual profits of the company and claim to all its
assets and cash flow once the creditors, employees, suppliers, and taxes are
paid off (residual claim or residual rights).

2) Standard voting rights: typically, one vote per share provided to

shareholders to vote in board elections and other key changes to the charter
and bylaws. It can be altered by issuing several classes of stock.

3) Super voting rights: provide the shareholders (proxies) with multiple votes
per share, increasing their influence and control over the company, as transfer
voting rights to another party.
4) Non-voting stock: usually for a temporary period of time.

5) No maturity date (infinite life): no promised date when investment is

returned.

6) Treasury stock: non-dividend paying, non-voting shares being held by the

issuing firm right from the time they were first issued in the market.

7) Preemptive rights: privileges that allow current common shareholders to

buy a fixed percentage of all future issues before they are offered to the
general public. It enables them to maintain their proportional ownership in the
company.

8) Capital (stock) market: stocks are traded in two types of markets, primary
market and secondary market.

9) Primary (first sale) market: market where issuing firm is involved.

10) Secondary (after-sale) market: market where common stock can be traded
among investors themselves. It provides liquidity and variety.

11) Bull market: is when a financial market experiences price rises or

expectation to rise.

12) Bear market: is when a financial market experiences prolonged price

declines.
13) Fundamental analysis: estimating a company’s value from things like the
accounts, and then buying if this value is above the share (market) price.

14) Technical analysis: looking at the trend in stock price, as it indicates buying
and selling pressure, and hence predict the future direction of stock prices.

15) Gordon Growth Model (GGM): model which dividends are growing at a
constant growth rate.

16) Two stage DDM: model which growth is divided into two stages, initial
super-growth and final constant growth, as it is unlikely that growth will be the
same in every year.
 17) Residual income model: a model where companies are valued by
substituting profits for dividends using the clean surplus relationship, since
some companies do not pay dividends.

18) Clean surplus relationship: Earnings Per Share (EPS) minus dividends per
share is equal to the change in Book value per share (∆B) during the year.

19) Free Cash Flow (FCF): a model where companies are valued by substituting
cash flow for dividends, since some companies do not make profits.

20) Dividend Yield (DY) ratio: Gives a rate of return on the investment.

21) Price Earnings (PE) ratio: Shows how many years it will take to repay the
investment in the share.

22) Price to Book (PB) ratio: Shows the market price of the net assets
compared to the cost of their purchase.

23) Efficient Market Hypothesis (EMH): assess efficiency by information,

either weak, semi-strong, or strong.

Strong form Semi-strong form Weak form

Sets all information of any kind, Sets all publicly available Sets past price and volume.
public or private. information.

“Chapter 9: Capital Budgeting”

1) Capital budgeting: the process of determining which real investment

projects should be accepted and given an allocation of funds from the firm.

2) Payback period: the length of time in which an investment pays back its
original cost. Thus, its main focus is on cost recovery.

3) Net Present Value (NPV): the most important capital budgeting decision
model that expressed by the present value of all benefits (cash inflows) minus
the present value of all costs (cash outflows). It either positive or negative.

4) Internal Rate of Return (IRR): the discount rate which forces the sum of all
the discounted cash flows from a project to equal 0.