NFSI flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Accounting Equation
- Assets equal liabilities plus shareholders' equity. Each recorded transaction must keep both sides of the balance sheet in balance.
- Accrual Accounting
- Revenue is recorded when earned and expenses when incurred, regardless of when cash actually changes hands.
- Straight-Line Depreciation
- Annual expense equals cost minus salvage value, divided by estimated useful life. Produces equal expense each period.
- Deferred Tax Liability
- A balance-sheet obligation created when taxable income is lower than book income because of temporary timing differences that reverse later.
- Current Ratio
- Current assets divided by current liabilities. Measures short-term liquidity and ability to cover obligations due within one year.
- DuPont Analysis
- Decomposes return on equity into net profit margin, asset turnover, and financial leverage, revealing which driver produces returns.
- Cash Conversion Cycle
- Days inventory outstanding plus days sales outstanding minus days payables outstanding. Lower values imply faster cash recovery.
- Common-Size Statements
- Financial statements restated so each line is a percentage of revenue or total assets, enabling comparison across firms and time.
- Weighted Average Cost of Capital
- Blend of after-tax cost of debt and cost of equity weighted by capital structure proportions, used to discount project cash flows.
- Capital Asset Pricing Model
- Required return equals the risk-free rate plus beta multiplied by the market risk premium.
- Net Present Value
- Sum of discounted future cash flows minus the initial investment. Positive NPV projects add value and should be accepted.
- Free Cash Flow to Firm
- Operating cash flow after taxes minus capital expenditures and increases in net working capital, available to all capital providers.
- Gordon Growth Model
- Values a stock as next year's dividend divided by the required return minus the constant growth rate. Requires growth below required return.
- Justified P/E Ratio
- The dividend payout ratio divided by the required return minus growth. Compares fair valuation to the observed price multiple.
- Sustainable Growth Rate
- Approximated as return on equity multiplied by the retention ratio, the pace a firm can grow without new external equity.
- Semi-Strong Market Efficiency
- Prices reflect all publicly available information, so trading on published news cannot reliably earn abnormal returns.
- Modified Duration
- Macaulay duration divided by one plus yield per period. Approximates the percentage price change for a small yield change.
- Convexity Adjustment
- Adds one-half times convexity times the squared yield change to the duration estimate, improving price-change accuracy for large moves.
- Credit Spread
- Difference between the yield on a risky bond and a comparable-maturity government bond, compensating investors for default and liquidity risk.
- Reinvestment Risk
- Risk that future coupon payments or principal must be reinvested at lower rates. Most acute for short, high-coupon bonds.
- Put-Call Parity
- For European options, call minus put equals the underlying price minus the present value of the strike price.
- Long Forward Payoff
- At maturity, the long position gains the spot price minus the agreed forward price; losses occur if spot falls below it.
- Survivorship Bias
- Upward distortion of reported returns when failed or closed funds are excluded from a performance database.
- Smoothed Appraisal Values
- Illiquid assets priced by periodic appraisal show understated volatility and overstated diversification benefits in reported return series.
- Portfolio Expected Return
- Weighted average of each asset's expected return, using portfolio weights as the multipliers.
- Sharpe Ratio
- Portfolio return minus the risk-free rate, divided by portfolio standard deviation. Measures excess return per unit of total risk.
- Capital Allocation Line
- Shows combinations of the risk-free asset and the optimal risky portfolio, plotting expected return against total risk.
- Portfolio Beta
- Weighted average of asset betas. Measures the portfolio's sensitivity to systematic market movements.
- Fiduciary Duty
- Obligation to act in the client's best interest, placing client interests ahead of the professional's or firm's interests.
- Material Nonpublic Information
- Information that could move prices and is not public. Trading on it or sharing it violates professional standards.
- Fair Dealing
- Treating all clients equitably when disseminating recommendations, so no client gains an unfair timing advantage.
- Conflict of Interest Disclosure
- Obligation to inform clients and employers of relationships or incentives that could bias recommendations or services.