FIMS flashcards

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

Money Market Instruments

Short-term debt instruments maturing in one year or less, including Treasury bills, commercial paper, certificates of deposit, and repurchase agreements, used for liquidity management.

Bid-Ask Spread

The difference between the highest price a buyer will pay and the lowest price a seller will accept; it is an implicit transaction cost borne by the trader.

Limit Order

An order to buy or sell a security only at a specified price or better. It guarantees price but not execution, unlike a market order which guarantees execution but not price.

Preferred Shares

Equity securities that rank ahead of common stock for dividend payments and liquidation proceeds, usually pay a fixed dividend, and typically carry no voting rights.

Zero-Coupon Bond

A bond issued at a discount to par that pays no periodic interest; the investor's return comes entirely from the difference between purchase price and par value at maturity.

GDP Expenditure Identity

Gross domestic product equals consumption plus investment plus government spending plus net exports (exports minus imports), measured in current or base-year prices.

GDP Deflator

A price index calculated as nominal GDP divided by real GDP, multiplied by 100; it measures the change in prices of all goods and services in the economy.

Natural Rate of Unemployment

The unemployment level consistent with stable inflation in the long run; the long-run Phillips curve is vertical at this rate, so no lasting inflation-unemployment trade-off exists.

Covered Interest Rate Parity

The forward exchange rate premium or discount equals the interest rate differential between two currencies; deviations create arbitrage opportunities that traders quickly close.

DuPont Analysis

Decomposes return on equity into net profit margin times asset turnover times the equity multiplier, isolating profitability, efficiency, and leverage drivers of returns.

Free Cash Flow to Firm

Cash available to all capital providers, calculated as EBIT times one minus the tax rate, plus depreciation, minus capital expenditure and increases in net working capital.

Weighted Average Cost of Capital

The blended after-tax cost of debt and cost of equity weighted by their market value proportions in the capital structure; used to discount free cash flow to the firm.

Net Present Value Rule

Accept projects with positive NPV, calculated by discounting expected cash flows at the required return and subtracting the initial outlay; it directly measures value added.

Sustainable Growth Rate

The maximum growth a firm can achieve without external equity, equal to return on equity multiplied by the retention ratio, where retention equals one minus the payout ratio.

Justified P/E Ratio

The price-to-earnings multiple supported by fundamentals, equal to the dividend payout ratio divided by the difference between required return and expected growth.

Modified Duration

A measure of a bond's percentage price change for a one percent change in yield, calculated as Macaulay duration divided by one plus yield per period.

Bond Convexity

The second-order sensitivity of bond price to yield changes; positive convexity means price gains exceed losses for equal-magnitude yield moves, improving the estimate beyond duration alone.

Enterprise Value

The total value of a firm's operating assets, equal to market value of equity plus market value of debt minus cash and equivalents; used with EBITDA for capital-structure-neutral comparison.

Forward Rate Agreement

A contract fixing an interest rate for a future borrowing or lending period; its value moves inversely with the reference rate and settles in cash at the start of the period.

Put-Call Parity

For European options on a non-dividend stock, a call plus the present value of the strike equals a put plus the stock price; violations permit riskless arbitrage.

Option Delta

The change in option price for a one-unit change in the underlying price; call deltas range from zero to one and put deltas from minus one to zero.

Value at Risk

The maximum loss not exceeded with a stated confidence level over a defined horizon; it ignores losses beyond the threshold and is not sub-additive across portfolios.

Minimum-Variance Hedge Ratio

The futures position size relative to the spot exposure that minimizes hedge variance, computed as the regression coefficient of spot returns on futures returns.

Capital Asset Pricing Model

Expected return equals the risk-free rate plus beta times the market risk premium; beta measures the sensitivity of a security's returns to market returns.

Sharpe Ratio

Excess portfolio return above the risk-free rate divided by portfolio standard deviation; it measures return per unit of total risk and suits fully diversified portfolios.

Efficient Frontier

The set of portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient because risk can be reduced without sacrificing return.

Strategic Asset Allocation

The long-term policy mix of asset classes chosen from the investor's objectives, risk tolerance, and constraints; it is the primary driver of long-run portfolio return variability.

Fiduciary Duty

The obligation to act in the client's best interest, comprising a duty of loyalty that subordinates personal interest and a duty of care requiring competence and prudence.

Material Nonpublic Information

Information that could affect a security's price and is not publicly available; trading on it or tipping others violates securities law and professional standards.

Mosaic Theory

Assembling material conclusions from individually nonmaterial public and nonpublic data points is permissible; acting on information that is itself material and nonpublic is not.

Investment Policy Statement

A written document specifying the client's return objective, risk tolerance, and constraints of liquidity, time horizon, tax, legal, and unique circumstances, plus review guidelines.

Human Capital

The present value of a client's future labor income; it is a large asset for younger clients and influences the appropriate allocation of financial capital to risky assets.