KASNEB CIFA Advanced key terms

The estimated worth of a security based on the cash flows it is expected to produce and the risk attached to them, rather than on its current market price. Analysts compare the two to judge whether an asset looks cheap or expensive.

The gap between a security's estimated intrinsic value and the price actually paid for it. Buying well below estimated worth leaves room for error if the underlying forecasts turn out to be too optimistic.

A method that projects the cash an asset will generate in future periods and converts those amounts into today's money using a discount rate that reflects both time and risk.

The minimum annual return an investor demands before committing funds to a particular investment, made up of the risk-free rate plus compensation for the risks taken. It is the rate used to discount expected cash flows.

A company's profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period, showing how much profit each share represents.

A share's market price divided by its earnings per share. It shows how much investors are paying for each unit of current profit and is usually compared with peer companies or the market average.

A share valuation approach that treats the present value of expected future dividends as the value of the share, with assumptions about dividend growth applied to those future payments.

Cash remaining after a business meets its operating costs and reinvests in fixed assets and working capital, and therefore available to lenders and shareholders. It is widely used in valuation because it is hard to manipulate.

A technique that recalculates a valuation or forecast under alternative assumptions for key variables, showing how much the answer changes when inputs such as growth rates or discount rates are varied.

The study of a company's financial statements, competitive position and the economic environment in order to estimate what its securities are really worth, rather than relying on price patterns.

Forecasting price movements from charts of past prices and trading volumes, based on the belief that market behaviour repeats itself and that established trends tend to continue.

The annual return an investor earns by buying a bond at its current price and holding it until maturity, assuming every coupon received is reinvested at that same rate.

A measure of how long, in present-value terms, a bondholder waits to receive a bond's cash flows; it is also used as an indicator of how much the bond's price will react to interest rate changes.

A refinement of duration that captures how a bond's sensitivity to interest rates itself changes as yields move, describing the curvature of the relationship between bond prices and yields.

The extra yield a bond offers over a risk-free benchmark of similar maturity, paid to investors as compensation for the possibility that the issuer fails to meet its obligations.

Ordinary shareholders' equity as reported on the balance sheet divided by the number of ordinary shares outstanding, giving the accounting net worth attributable to each share.

A bond that pays interest like an ordinary bond but may be exchanged by the holder for a set number of the issuer's shares, so it carries features of both debt and equity.

The quoted price of a bond that excludes interest accrued since the last coupon date. The buyer actually pays the clean price plus accrued interest, and the total is called the dirty price.

Interest that has built up on a bond since the last coupon payment date but has not yet been paid out; the buyer compensates the seller for this amount when the trade settles.

Spreading money across assets whose returns do not move together, so that poor results in some holdings are offset by others, lowering risk without necessarily reducing expected return.

The part of a security's risk caused by economy-wide factors such as interest rates, inflation or political events, which cannot be removed by simply holding more securities.

Risk that is specific to one company or industry, such as a strike, fraud or product failure, and which can largely be eliminated by holding a well diversified portfolio.

A number showing how strongly a security's returns tend to move when the overall market moves. A beta above one indicates greater swings than the market, while below one indicates smaller swings.

A model that sets an asset's expected return as the risk-free rate plus its beta multiplied by the market risk premium, and is widely used to estimate a company's cost of equity.

A portfolio's return above the risk-free rate divided by the standard deviation of its returns, measuring how much excess return is earned for each unit of total risk taken.

The set of portfolios that give the highest expected return for each level of risk, or the lowest risk for each expected return, formed from different mixes of risky assets.

The decision about how much of a portfolio to place in each broad asset class, such as shares, bonds, property and cash, guided by the investor's goals, time horizon and tolerance for risk.

The difference between a portfolio's actual return and the return the capital asset pricing model predicts for its level of beta, indicating whether the manager added or destroyed value.

The market in which securities are issued and sold for the first time, with the money raised going to the issuer, as happens in an initial public offering or a new bond issue.

The market where investors trade securities that have already been issued among themselves, providing liquidity and price discovery; the issuing entity receives no new funds from these trades.

The first sale of a company's shares to the general public, which moves it from private to listed ownership and usually raises fresh capital for the business.

An arrangement in which an investment bank or syndicate commits to take up a new issue at an agreed price and resell it to investors, bearing the risk that the securities are not fully bought.

A price discovery process for a new issue in which the arranging bank gathers indications of demand from investors at various price levels and uses them to fix the final offer price and allocations.

A firm that continuously quotes both buying and selling prices for a security and is prepared to trade at those prices, earning the difference while helping to keep the market liquid.

The ease and speed with which an asset can be bought or sold in significant size without moving its price much. Cash is the most liquid asset, while property and unlisted shares are among the least.

The difference between the highest price a buyer will pay and the lowest price a seller will accept for a security; a narrow spread usually signals an actively traded, cheaper-to-trade market.

A short-term funding arrangement in which one party sells securities and agrees to buy them back at a later date at a slightly higher price, in substance a loan secured by those securities.

A decentralised market where dealers trade securities directly with one another by telephone or electronic network rather than through a central exchange, common for bonds and smaller company shares.