ICAP PRC-3 Business and Economic Insights flashcards

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

Price elasticity of demand

Measures responsiveness of quantity demanded to a price change; calculated as percentage change in quantity divided by percentage change in price. Absolute value above one is elastic, below one inelastic.

Business cycle

Recurring pattern of economic activity through expansion, peak, contraction, and trough. A recession is often defined as two consecutive quarters of declining real GDP.

Real interest rate

Nominal interest rate adjusted for inflation, approximately nominal rate minus inflation rate. It reflects the true purchasing-power return to lenders and the real cost to borrowers.

Comparative advantage

A country or firm has a comparative advantage when it produces a good at a lower opportunity cost than another producer, forming the basis for mutually beneficial trade even without absolute advantage.

Bond yield to maturity

The discount rate that equates the present value of a bond's future coupon and principal payments to its current market price. Bond prices and yields move in opposite directions.

Duration

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Modified duration estimates percentage price change for a one percent change in yield.

CAPM

Capital Asset Pricing Model: required return equals risk-free rate plus beta times the market risk premium. Beta measures a security's systematic risk relative to the market.

Efficient market hypothesis

Theory that security prices reflect available information. Weak form reflects past prices, semi-strong form public information, strong form all information including private. Implies difficulty of consistently beating the market.

Double-entry bookkeeping

Accounting system where every transaction has equal debit and credit entries, keeping assets equal liabilities plus equity. Debits increase assets and expenses; credits increase liabilities, equity, and revenue.

Accrual accounting

Recognizes revenue when earned and expenses when incurred, regardless of cash timing. The matching principle aligns expenses with the revenues they help generate.

Current ratio

Current assets divided by current liabilities. It indicates short-term liquidity and ability to meet obligations due within one year; a higher ratio generally suggests stronger liquidity.

Statement of cash flows

Financial statement classifying cash movements into operating, investing, and financing activities. The indirect method starts with profit and adjusts for non-cash items and working capital changes.

Net present value

Sum of present values of expected future cash flows minus initial investment, discounted at the required rate. A positive NPV indicates the project adds value and should be accepted.

Weighted average cost of capital

Blended required return on a firm's debt and equity, weighted by their market value proportions. Used as the discount rate for projects of average risk.

Modigliani-Miller theorem

Without taxes and market imperfections, capital structure does not affect firm value. With corporate taxes, debt creates a tax shield that can increase value, offset by distress costs.

Cash conversion cycle

Days inventory outstanding plus days sales outstanding minus days payable outstanding. It measures how long cash is tied up in operations before collection from customers.

Break-even point

Sales level at which total revenue equals total costs, yielding zero profit. In units, fixed costs divided by contribution margin per unit; in revenue, fixed costs divided by contribution margin ratio.

Contribution margin

Sales revenue minus variable costs. It represents the amount available to cover fixed costs and generate profit, and is central to cost-volume-profit analysis.

Absorption costing

Product costing method that includes direct materials, direct labour, and both variable and fixed production overhead in unit product cost. Fixed overhead is expensed through cost of goods sold when products are sold.

Relevant cost

A future, incremental cash flow that differs between decision alternatives. Sunk costs and allocated fixed costs are irrelevant because they do not change with the decision.

Porter's five forces

Framework analyzing industry attractiveness through rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers.

Ansoff matrix

Growth strategy framework with four quadrants: market penetration (existing products, existing markets), market development, product development, and diversification (new products, new markets).

Agency problem

Conflict arising when managers (agents) pursue their own interests rather than those of shareholders (principals). Mitigated by board oversight, performance incentives, and transparent disclosure.

Corporate governance

System of rules, practices, and processes by which a company is directed and controlled. Addresses board independence, audit committees, risk management, shareholder rights, and accountability.

Descriptive analytics

Analytics category that summarizes historical data to show what happened, using reports, dashboards, and visualizations. It is the foundation for diagnostic, predictive, and prescriptive analytics.

Data quality dimensions

Characteristics used to assess data fitness for use, including accuracy, completeness, consistency, timeliness, validity, and uniqueness. Poor quality undermines analytics and decision-making.

IT general controls

Controls over the IT environment supporting reliable processing, including access management, change management, backup and recovery, and physical security. They underpin application controls.

Cloud service models

IaaS provides infrastructure, PaaS provides a development platform, and SaaS provides ready-to-use software. Responsibility for controls shifts from customer to provider as the model moves toward SaaS.

Contract elements

A valid contract generally requires offer, acceptance, consideration, intention to create legal relations, capacity, and legality of purpose. Missing an element can make the agreement unenforceable.

Separate legal personality

Company law principle that a corporation is a legal person distinct from its shareholders and directors. It underpins limited liability and the company's ability to own property and contract.

Anti-money laundering

Regulatory regime requiring financial institutions to perform customer due diligence, monitor transactions, keep records, and report suspicious activity to authorities to prevent laundering of criminal proceeds.

Integrity

Fundamental ethical principle requiring straightforwardness and honesty in all professional and business relationships. It includes fair dealing and avoiding misleading statements or omissions.