IFMP Financial Analysts Certification Level 1, Pakistan key terms

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

The value today of a future cash flow or stream of cash flows, obtained by discounting those amounts back at an appropriate rate of return.

The process by which interest or returns are added to principal so that subsequent earnings are calculated on the enlarged balance, generating growth on growth.

The rate used to convert future cash flows into present values, reflecting the opportunity cost of capital and the risk attached to those cash flows.

The sum of a project's expected cash flows discounted to today, minus its initial cost; a positive result suggests the investment adds value.

The discount rate at which an investment's expected cash flows have a net present value of exactly zero, often used as a hurdle measure for project acceptance.

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

An annuity that continues forever, whose present value equals the periodic payment divided by the discount rate when the payment is constant.

The relationship in which investments offering higher expected returns generally carry higher uncertainty, so investors demand extra compensation for accepting more risk.

A statistical measure of how widely returns vary around their average, commonly used as a gauge of total investment risk or volatility.

The average squared deviation of returns from their mean; its square root is the standard deviation and it underlies portfolio risk calculations.

A measure of how two variables move together; positive values indicate returns tend to rise and fall in tandem, negative values indicate they move oppositely.

A standardised number between minus one and plus one showing the strength and direction of the linear relationship between two return series.

Spreading money across assets whose returns are not perfectly correlated, so that total portfolio risk falls without necessarily sacrificing expected return.

Risk that affects the whole market, such as inflation, interest-rate shifts or political events, and cannot be removed by holding more securities.

Risk specific to a single company or industry, such as a strike or product failure, which can be largely reduced through diversification.

A sensitivity measure showing how much a security's returns tend to move when the overall market moves; a beta above one implies greater market sensitivity.

A model pricing an asset's expected return as the risk-free rate plus beta multiplied by the market risk premium, linking required return to systematic risk.

The extra expected return investors require above the risk-free rate as compensation for holding a risky asset rather than a safe one.

The return on an investment considered free of default risk, typically proxied by short-dated government securities and used as a baseline in valuation models.

The minimum return a company must earn on its investments to satisfy lenders and shareholders, usually expressed as a weighted average of debt and equity costs.

A blended required return computed by weighting the after-tax cost of debt and the cost of equity by their proportions in the firm's capital structure.

The mix of debt and equity a company uses to finance its assets, which influences financial risk, cost of capital and returns to shareholders.

The use of borrowed funds to increase the potential return on equity, which also magnifies losses when operating results disappoint.

The ease and speed with which an asset can be converted into cash at a fair price without causing a significant movement in its market value.

The gap between the highest price a buyer will pay and the lowest price a seller will accept, a common indicator of market liquidity and trading cost.

The idea that security prices quickly incorporate available information, making consistent excess returns from that information difficult to achieve.

A theory holding that prices reflect all relevant information in weak, semi-strong or strong form, so active strategies struggle to beat the market consistently.

Simultaneously buying and selling equivalent assets in different markets to profit from a price difference, with little or no residual market risk.

A financial contract whose value depends on an underlying asset, rate or index, commonly used for hedging risk or taking leveraged positions.

A standardised exchange-traded agreement to buy or sell a specified quantity of an asset at a set price on a future settlement date.

A contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a stated price before or on expiry.

Taking an offsetting position in a related instrument to reduce exposure to an adverse price, interest-rate or currency movement.

The total annual return an investor earns by holding a bond to maturity, assuming all coupons are reinvested at that same rate.

The stated annual interest a bond pays, expressed as a percentage of its face value and fixed at issuance for most conventional bonds.

A measure of a bond's price sensitivity to interest-rate changes, expressed in years and combining maturity, coupon and yield effects.

The risk that changes in market interest rates will reduce the value of a fixed-income investment or alter the cost of borrowing.

The possibility that a borrower fails to make scheduled interest or principal payments, or that a counterparty defaults on an obligation.

An independent agency's opinion of a borrower's ability and willingness to meet debt obligations, usually expressed on a letter-grade scale.