Finance Chapter 6/7 Terms

Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit.

a computed measure of how much scores vary around the mean score

the risk related to an investment return that can be eliminated through diversification (diversifiable)

risk that affects all companies in the stock market (nondiversifiable)

Spreading out investments to reduce risk

the rate of return earned on an investment, which equals the dollar gain divided by the amount invested

It is a measure of how an individual's stocks returns vary with market returns. Measure of the "sensitivity"

the relationship between a portfolio's returns and the market returns. It is a measure of the portfolio's nondiversifiable risk

allocation of an investment portfolio across broad asset classes

the rate of return on risk-free investments. The interest rates on short-term U.S. government securities are commonly used to measure this rate

minimum rate of return necessary to attract an investor to purchase or hold a security

The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (or R&D) activity.

the excess return required from an investment in a risky asset over that required from a risk-free investment

a model that relates the required rate of return on a security to its systematic risk as measured by beta

a positively sloped straight line displaying the relationship between expected return and beta

A financial security that represents a promise to repay a fixed amount of funds

an unsecured debt, usually with a maturity of 10 years or more

A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds.

bond denominated in a currency other than that of the country in which it is sold

Bonds that can be converted into common stock at the bondholder's option

a value assigned to a share of stock and printed on the stock certificate

the stated annual interest rate on a bond

a bond that pays a fixed amount of interest to the investor each year

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

the time at which payment to a bondholder is due

bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity

a prespecified time period during which a company cannot recall a bond

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

High-risk, high-interest bonds

A rating assigned to a firm to measure the probability of default by a company like S&P or Moody's.

the difference between the cost of a depreciable asset and its related accumulated depreciation

net amount that can be realized by selling the assets of a firm and paying off the debt

observed value of an asset, determined by S&D

An estimate of a stock's "true" value based on accurate risk and return data. Can be estimated but not measured precisely.

the accuracy of the predicted return on the investment.

the rate required in the market on a bond

a bond's annual coupon divided by its price

As interest rates increase, the value of the bond decreases. The market value of a bond will be less than the par value if the required rate of return of investor's is above the coupon interest rate. Long term bonds have greater interest rate risk than short term bonds.

the risk of capital losses to which investors are exposed because of changing interest rates

the difference between the face value of a bond and its selling price when a bond is sold for less than its face value

The difference between the selling price and the face value of a bond when a bond is sold for more than its face value.