(1)
Financial management Financial management Concerns the acquisition, financing, and
management of assets with some overall goal in mind. The main goal of a firm is profit
maximization.
Agent(s) Individual(s) authorized by another person, called the principal, to act on the
latter’s behalf.
Agency (theory) A branch of economics relating to the behavior of principals (such as
owners) and their agents (such as managers)
(2)
Sole proprietorship A business form for which there is one owner. This single owner has
unlimited liability for all debts of the firm.
Partnership A business form in which two or more individuals act as owners. In a general
partnership all partners have unlimited liability for the debts of the firm; in a limited
partnership one or more partners may have limited liability.
Limited partner Member of a limited partnership not personally liable for the debts of
the partnership.
General partner Member of a partnership with unlimited liability for the debts of the
partnership.
Corporation A business form legally separate from its owners. Its distinguishing features
include limited liability, easy transfer of ownership, unlimited life, and an ability to raise
large sums of capital.
Depreciation The systematic allocation of the cost of a capital asset over a period of
time for financial reporting purposes, tax purposes, or both.
Straight-line depreciation A method of depreciation that allocates expenses evenly over
the depreciable life of the asset.
Accelerated depreciation Methods of depreciation that write off the cost of a capital
asset faster than under straightline depreciation.
Declining-balance depreciation Methods of depreciation calling for an annual charge
based on a fixed percentage of the asset’s depreciated book value at the beginning of
the year for which the depreciation charge applies.
Cash dividend Cash distribution of earnings to stockholders, usually on a quarterly basis.
Capital gain (loss) The amount by which the proceeds from the sale of a capital asset
exceeds (is less than) the asset’s original cost.
Financial markets All institutions and procedures for bringing buyers and sellers of
financial instruments together.
Money market The market for short-term (less than one year original maturity)
government and corporate debt securities. It also includes government securities
, originally issued with maturities of more than one year but that now have a year or less
until maturity.
Capital market The market for relatively long-term (greater than one year original
maturity) financial instruments (e.g., bonds and stocks).
Primary market A market where new securities are bought and sold for the first time (a
“new issues” market).
Secondary market A market for existing (used) securities rather than new issues.
Financial intermediaries Financial institutions that accept money from savers and use
those funds to make loans and other financial investments in their own name. They
include commercial banks, savings institutions, insurance companies, pension funds,
finance companies, and mutual funds.
Default The failure to meet the terms of a contract, such as failure to make interest or
principal payments when due on a loan.
Marketability (or liquidity) The ability to sell a significant volume of securities in a short
period of time in the secondary market without significant price concession.
Maturity The life of a security; the amount of time before the principal amount of a
security becomes due.
(3)
Interest Money paid (earned) for the use of money.
Simple interest Interest paid (earned) on only the original amount, or principal,
borrowed (lent).
Future value (terminal value) The value at some future time of a present amount of
money, or a series of payments, evaluated at a given interest rate.
Present value The current value of a future amount of money, or a series of payments,
evaluated at a given interest rate.
Compound interest Interest paid (earned) on any previous interest earned, as well as on
the principal borrowed (lent).
Discount rate (capitalization rate) Interest rate used to convert future values to present
values.
Annuity A series of equal payments or receipts occurring over a specified number of
periods. In an ordinary annuity, payments or receipts occur at the end of each period; in
an annuity due, payments or receipts occur at the beginning of each period.
Perpetuity An ordinary annuity whose payments or receipts continue forever.
Nominal (stated) interest rate A rate of interest quoted for a year that has not been
adjusted for frequency of compounding. If interest is compounded more than once a
year, the effective interest rate will be higher than the nominal rate.
Effective annual interest rate The actual rate of interest earned (paid) after adjusting the
nominal rate for factors such as the number of compounding periods per year.
Financial management Financial management Concerns the acquisition, financing, and
management of assets with some overall goal in mind. The main goal of a firm is profit
maximization.
Agent(s) Individual(s) authorized by another person, called the principal, to act on the
latter’s behalf.
Agency (theory) A branch of economics relating to the behavior of principals (such as
owners) and their agents (such as managers)
(2)
Sole proprietorship A business form for which there is one owner. This single owner has
unlimited liability for all debts of the firm.
Partnership A business form in which two or more individuals act as owners. In a general
partnership all partners have unlimited liability for the debts of the firm; in a limited
partnership one or more partners may have limited liability.
Limited partner Member of a limited partnership not personally liable for the debts of
the partnership.
General partner Member of a partnership with unlimited liability for the debts of the
partnership.
Corporation A business form legally separate from its owners. Its distinguishing features
include limited liability, easy transfer of ownership, unlimited life, and an ability to raise
large sums of capital.
Depreciation The systematic allocation of the cost of a capital asset over a period of
time for financial reporting purposes, tax purposes, or both.
Straight-line depreciation A method of depreciation that allocates expenses evenly over
the depreciable life of the asset.
Accelerated depreciation Methods of depreciation that write off the cost of a capital
asset faster than under straightline depreciation.
Declining-balance depreciation Methods of depreciation calling for an annual charge
based on a fixed percentage of the asset’s depreciated book value at the beginning of
the year for which the depreciation charge applies.
Cash dividend Cash distribution of earnings to stockholders, usually on a quarterly basis.
Capital gain (loss) The amount by which the proceeds from the sale of a capital asset
exceeds (is less than) the asset’s original cost.
Financial markets All institutions and procedures for bringing buyers and sellers of
financial instruments together.
Money market The market for short-term (less than one year original maturity)
government and corporate debt securities. It also includes government securities
, originally issued with maturities of more than one year but that now have a year or less
until maturity.
Capital market The market for relatively long-term (greater than one year original
maturity) financial instruments (e.g., bonds and stocks).
Primary market A market where new securities are bought and sold for the first time (a
“new issues” market).
Secondary market A market for existing (used) securities rather than new issues.
Financial intermediaries Financial institutions that accept money from savers and use
those funds to make loans and other financial investments in their own name. They
include commercial banks, savings institutions, insurance companies, pension funds,
finance companies, and mutual funds.
Default The failure to meet the terms of a contract, such as failure to make interest or
principal payments when due on a loan.
Marketability (or liquidity) The ability to sell a significant volume of securities in a short
period of time in the secondary market without significant price concession.
Maturity The life of a security; the amount of time before the principal amount of a
security becomes due.
(3)
Interest Money paid (earned) for the use of money.
Simple interest Interest paid (earned) on only the original amount, or principal,
borrowed (lent).
Future value (terminal value) The value at some future time of a present amount of
money, or a series of payments, evaluated at a given interest rate.
Present value The current value of a future amount of money, or a series of payments,
evaluated at a given interest rate.
Compound interest Interest paid (earned) on any previous interest earned, as well as on
the principal borrowed (lent).
Discount rate (capitalization rate) Interest rate used to convert future values to present
values.
Annuity A series of equal payments or receipts occurring over a specified number of
periods. In an ordinary annuity, payments or receipts occur at the end of each period; in
an annuity due, payments or receipts occur at the beginning of each period.
Perpetuity An ordinary annuity whose payments or receipts continue forever.
Nominal (stated) interest rate A rate of interest quoted for a year that has not been
adjusted for frequency of compounding. If interest is compounded more than once a
year, the effective interest rate will be higher than the nominal rate.
Effective annual interest rate The actual rate of interest earned (paid) after adjusting the
nominal rate for factors such as the number of compounding periods per year.
