KASNEB CIFA Advanced flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Net Present Value

The sum of a project's future cash flows discounted at the required rate of return, less the initial outlay. A positive NPV means the project adds value and should be accepted.

Internal Rate of Return

The discount rate that makes a project's net present value equal to zero. A project is acceptable when the IRR exceeds the required rate of return.

Profitability Index

The present value of a project's future cash inflows divided by its initial investment outlay. A value above 1.0 signals acceptance because inflows exceed the outlay in present-value terms.

Payback Period

The time taken for cumulative cash inflows to recover the initial investment. It ignores the time value of money and all cash flows arising after the cut-off date.

Capital Asset Pricing Model

A model pricing an asset as the risk-free rate plus a beta-scaled market risk premium: E(R) = Rf + beta x (Rm - Rf). Beta captures systematic risk relative to the market portfolio.

Fisher Effect

The relationship linking nominal and real interest rates: (1 + nominal) = (1 + real) x (1 + inflation). Approximately, the nominal rate equals the real rate plus expected inflation.

Gordon Growth Model

Values a share as D1 divided by (k - g), where D1 is next year's dividend, k the required return and g the constant dividend growth rate. It is valid only when k exceeds g.

Weighted Average Cost of Capital

The blended after-tax cost of a firm's debt and equity, weighted by their market-value proportions. It is the discount rate normally applied to projects of average business risk.

Earnings Per Share

Net profit after tax less preference dividends, divided by the weighted average number of ordinary shares outstanding during the period. It is the denominator for most price multiples.

Price Earnings Ratio

Market price per share divided by earnings per share. It shows how much investors pay for one unit of current or forecast earnings and reflects growth expectations and perceived risk.

Dividend Payout Ratio

Dividends per share divided by earnings per share, expressed as a percentage. The retention ratio equals one minus the payout ratio and finances reinvestment and future growth.

Quick Ratio

Current assets excluding inventory, divided by current liabilities. It tests short-term liquidity when stock cannot be converted into cash quickly enough to meet obligations.

DuPont Analysis

Decomposes return on equity into net profit margin, total asset turnover and the equity multiplier. It reveals whether profitability, operating efficiency or financial leverage drives the return.

Interest Cover

Earnings before interest and tax divided by the interest expense. It measures the safety margin available to lenders and signals rising distress risk when the ratio falls.

Semi-Strong Form Efficiency

A market condition in which prices fully reflect all publicly available information, so fundamental analysis of published accounts and announcements cannot produce consistent abnormal returns.

Intrinsic Value

The present value of expected future cash flows from a security, estimated from fundamental data. Analysts compare it with market price; a price below intrinsic value suggests undervaluation.

Portfolio Expected Return

The weighted average of the expected returns of the individual securities held, using their market-value proportions as weights. Unlike variance, it requires no correlation term.

Diversification and Correlation

Risk reduction from combining assets is greatest when their returns are perfectly negatively correlated, that is correlation of minus one, and disappears entirely when correlation is positive one.

Beta Coefficient

The covariance of a security's return with the market return divided by the market variance. A beta above one means the security is more volatile than the market portfolio.

Sharpe Ratio

Portfolio excess return above the risk-free rate divided by the standard deviation of returns. It measures reward per unit of total risk and suits undiversified portfolios.

Treynor Ratio

Excess portfolio return over the risk-free rate divided by portfolio beta. It measures reward per unit of systematic risk and suits portfolios that are already well diversified.

Jensen's Alpha

Actual portfolio return minus the return predicted by the capital asset pricing model. A positive alpha means outperformance after adjusting for the systematic risk taken.

Security Market Line

A graph of the capital asset pricing model plotting expected return against beta. Securities plotting above the line are undervalued and offer a positive alpha.

Systematic Risk

Market-wide risk arising from interest rates, inflation and economic conditions that cannot be diversified away. It is measured by beta and is the only risk the market prices.

Primary Market

The segment where new securities are issued and sold to investors for the first time, raising fresh capital for the issuer through initial public offers, rights issues or bond issues.

Secondary Market

The segment where already-issued securities are traded between investors. No new capital reaches the issuer, but prices and liquidity are established there.

Treasury Bill

A short-term government security maturing within one year, sold at a discount to face value. The discount, not a coupon, provides the investor's entire return.

Underwriting

An arrangement in which an investment bank guarantees the issuer a price for a new issue, buying any unsold securities itself under a firm-commitment agreement.

Bid-Ask Spread

The difference between the highest price a buyer will pay and the lowest price a seller will accept. It compensates market makers and widens as liquidity falls.

Inverted Yield Curve

A term structure in which short-term interest rates exceed long-term rates. It usually signals tight monetary policy and is widely monitored as a recession indicator.

Book Building

A price discovery method in which the underwriter collects investor bids across a range before setting the final offer price for a new securities issue.

Repurchase Agreement

A short-term money market transaction in which a dealer sells securities and agrees to repurchase them at a higher price on a set date, effectively a secured loan.