MAFF key terms

The principle that a sum of money available today is worth more than the same sum received later, because today's money can be invested to earn a return over time.

The current worth of a future cash flow or stream of cash flows, found by applying a discount rate that reflects the time and risk involved.

The rate used to convert future cash flows into today's value; it reflects the opportunity cost of capital plus compensation for risk and expected inflation.

The sum of a project's expected cash flows discounted to today minus its initial cost. A positive result suggests the investment adds value at the chosen discount rate.

The discount rate at which an investment's net present value equals zero. It is compared with a required return to judge whether a project is acceptable.

A series of equal cash payments made at regular intervals for a fixed number of periods, such as a level loan repayment or a fixed pension payout.

An endless stream of equal periodic cash flows. Its value equals the payment divided by the discount rate, and it is used to model terminal values.

A statistical measure of how widely returns scatter around their average. In finance it is the most common proxy for total risk or volatility of an investment.

Standard deviation divided by expected return. It expresses risk per unit of return, letting analysts compare investments with very different average returns.

A number between minus one and plus one showing how closely two return series move together. Lower correlation between assets improves diversification benefits in a portfolio.

A measure of how two variables move together over time. Positive values mean they tend to rise and fall in tandem; negative values mean they tend to offset each other.

The idea that higher expected returns generally require accepting greater uncertainty. Investors demand extra compensation for bearing additional risk over a risk-free alternative.

The extra expected return above the risk-free rate that investors require for holding a risky asset such as equity, credit, or property.

A system that records revenue when earned and expenses when incurred, regardless of when cash changes hands, giving a fuller picture of economic activity.

The rules determining when and how much revenue a company reports, typically when control of a good or service passes to the customer.

A statement listing a company's assets, liabilities, and shareholders' equity at a point in time, where assets equal liabilities plus equity.

A report of revenue, expenses, and profit over a period. It shows operating results from gross profit down to net income available to shareholders.

A statement splitting cash movements into operating, investing, and financing activities, reconciling opening and closing cash balances for the period.

Earnings before interest, taxes, depreciation, and amortization. It approximates operating cash earnings before capital structure and non-cash charges, often used as a valuation base.

Cash generated by operations after the capital spending needed to maintain and grow the asset base. It is the cash available to lenders and shareholders.

Current assets minus current liabilities. It measures the short-term liquidity tied up in inventory and receivables net of obligations due within a year.

Current assets divided by current liabilities. A value above one suggests the company can cover obligations falling due within the next twelve months.

Cash, marketable securities, and receivables divided by current liabilities. It excludes inventory, giving a stricter test of short-term liquidity than the current ratio.

A framework that decomposes return on equity into profit margin, asset turnover, and financial leverage, revealing which driver creates or erodes shareholder returns.

Net income divided by average shareholders' equity. It shows how much profit the company generates for each unit of owners' capital employed.

After-tax operating profit divided by the capital invested in the business. It indicates how efficiently both debt and equity funding are turned into operating profit.

An assessment of how sustainable and cash-backed reported profits are, looking at accruals, one-off items, and accounting choices that may flatter results.

The blended after-tax cost of a company's debt and equity, weighted by their shares of the capital structure. It is the usual discount rate for enterprise cash flows.

A model pricing an asset from the risk-free rate plus beta times the market risk premium. It estimates the required return on equity for valuation and capital budgeting.

A measure of how much an asset's returns move relative to the overall market. A beta above one implies greater sensitivity to market swings than the market itself.

The use of borrowed funds to increase the size of an investment or asset base. It magnifies both returns and losses to equity holders.

A valuation method that projects future free cash flows and discounts them to today at a rate reflecting risk, producing an estimate of intrinsic value.

The estimated value of all cash flows beyond the explicit forecast period, often computed with a perpetuity growth formula or an exit multiple.

The total value of a business to all capital providers, equal to market capitalization plus debt and other claims minus cash. It pairs with EBITDA in valuation multiples.

Share price divided by earnings per share. It shows how much investors pay for each unit of current profit and is widely used for relative valuation.

A valuation approach that values a share as the present value of its expected future dividends, often assuming a constant growth rate in dividends.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Longer duration means larger price moves when yields shift.

A measure of how duration itself changes as yields move, capturing the curvature of the price-yield relationship. It improves price estimates for larger rate changes.

The single discount rate that equates a bond's future coupons and principal to its current price, assuming the bond is held to maturity and coupons are reinvested.

The extra yield a bond offers over a comparable government security, compensating investors for default risk, liquidity, and other issuer-specific factors.

Risk that affects the whole market, such as interest rate or recession shocks, and cannot be removed by holding more securities. Beta measures this exposure.

Spreading investments across assets whose returns do not move in perfect lockstep, reducing portfolio volatility without necessarily lowering expected return.

The set of portfolios offering the highest expected return for each level of risk. Rational investors are assumed to choose from points along this curve.

Excess return over the risk-free rate divided by standard deviation. It measures return earned per unit of total risk taken.

An estimate of the largest loss a portfolio is expected to suffer over a set horizon at a given confidence level, such as one day at ninety-five percent.

Evaluating how a portfolio or institution would perform under severe but plausible scenarios, such as a sharp rate rise or market crash, beyond normal statistical assumptions.

The obligation to act solely in the best interest of a client or beneficiary, placing their interests ahead of the adviser's own and disclosing conflicts.

Situations where personal, firm, or third-party interests could compromise objectivity. They must be identified, disclosed, and managed or avoided where harm is likely.

Significant information not yet available to the market that could move a security's price. Trading or tipping on it breaches fair-dealing and insider-trading rules.

The professional standard requiring analysts to form judgments free from pressure by employers, clients, or issuers, and to avoid accepting gifts that could bias conclusions.