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WGU D076 Questions and Answers Already Passed Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? ... ✔✔Business finance What is the primary difference between finance and accounting? ✔✔Finance focuses on the future, while accounting is generally backward-looking. Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? ✔✔Investments An area of finance that deals with investment allocation and asset pricing. ✔✔Investments An area of finance that involves organizations that accept deposits, offer investment products, loan money, or broker financial transactions. ✔✔Financial Institutions An area of finance that involves activities used to increase shareholder wealth. ✔✔Corporate Finance. What is the primary aim of personal finance goals? ✔✔To maximize satisfaction from products purchased and services obtained What should be the main question a firm asks when considering any investment decision? ✔✔Do the benefits of this investment outweigh the costs? What is the primary goal of the financial manager of a firm? ✔✔To maximize owner wealth What are three main tasks that a financial manager of a firm does in order to achieve the goal of the firm, which is to maximize shareholder wealth? ✔✔making investment decisions, making financing decisions, and managing working capital. Who is the highest ranking officer in corporate finance? ✔✔CFO, Chief Financial Officer What does the CFO do? ✔✔The CFO is responsible for all the financial decisions made by the firm. He or she serves as the CEO's right-hand person in all money matters and oversees the financial analysis and decision-making of the firm. Which task does a financial manager perform when assessing the costs and benefits of potential projects? ✔✔Making investment decisions Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? ✔✔Private equity Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? ✔✔Making financing decisions What are the three most important types of securities? ✔✔Treasury, Corporate, and Stocks Why does the SEC oversee Financial Markets? ✔✔To protect Investors What are the purposes of financial markets? ✔✔To provide liquidity and determine prices In which financial market are securities such as stocks and bonds are traded after their initial issuance? ✔✔Secondary market What kind of market primarily allows institutions to borrow and lend in the short term? ✔✔Money market A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? ✔✔Primary market What is a depository institution? ✔✔An institution that accepts and pays interest on deposits of money, as well as extends loans What is the primary role of financial institutions? ✔✔To conduct financial transactions such as investments, loans, and deposits A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? ✔✔Investment bank Which type of financial institution deals mainly with providing for retirement through employers? ✔✔Pension fund How do insurance companies pay policyholders when a claim is made? ✔✔They use returns from stocks and bonds. Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? ✔✔Central bank What are the three types of economic indicators? ✔✔Leading, Lagging, and coincident Unemployment rate is which type of economic indicator? ✔✔Lagging The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? ✔✔To regulate inflation and unemployment What would an inverted yield curve signal? ✔✔It may indicate an economic downturn. In what way are coincident indicators useful? ✔✔They are analyzed during economic shifts to provide information about the current state of the economy. Which responsibility is a focus of the U.S. Securities and Exchange Commission? ✔✔To protect investors Which type of financial institution provides individuals and firms access to financial markets? ✔✔Investment institutions Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? ✔✔Private equity Yield curve is which type of economic indicator? ✔✔Leading Which type of error would result in a set repercussion or penalty given by the government? ✔✔Legal Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing? ✔✔Moral What characterizes an ethical action? ✔✔An ethical action is based on accepted standards of conduct. Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? ✔✔Moral The system of recording, reporting, and summarizing past financial information and transactions. ✔✔Accounting An activity ratio found by credit sales divided by accounts receivable. ✔✔Accounts Receivable Turnover (AR Turnover) A category of ratios that measure how well a company uses its assets to generate sales or cash, showing the firm's operational efficiency and profitability. ✔✔Activity Ratios Another name for the discretionary financing needed or external financing needed. It represents the additional financing needed given a firm's expectations for future growth. ✔✔Additional Funds Needed (AFN) A bond covenant that describes things the company pledges itself to do in order to protect bondholders.Go To ✔✔Affirmative Covenants Costs that are incurred when management does not act in the best interest of shareholders. ✔✔Agency Costs When the agent (the management) does not act in the best interest of the principal (the owners).Go To ✔✔Agency Problem Companies or securities with beta greater than 1. ✔✔Aggressive Assets The annual interest rate that is charged for borrowing money or that is earned through investment. ✔✔Annual Percentage Rate A stream of cash flows of an equal amount paid every consecutive period.Go To ✔✔Annuity A series of equal payments made at the beginning of consecutive periods.Go To ✔✔Annuity Due The process of valuing assets. ✔✔Asset Pricing A secondary market with a physical location and where prices are determined by investors' willingness to pay.Go To ✔✔Auction Market An activity ratio found by the number of days in a year (365) divided by AR turnover.Go To ✔✔Average Collection Period (ACP) Using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances. ✔✔Balance Sheet Forecasting Receive deposits and extend loans to individuals and businesses. ✔✔Banks and Credit Unions The process of completing a financial analysis to compare a firm's financial performance to that of other similar firms. ✔✔Benchmarking A variable that describes how the price of a security varies with the market. ✔✔Beta The difference between the bid and ask prices that compensate the specialist for the risk that he or she bears for willingness to provide liquidity. ✔✔Bid-ask Spread A group of people who jointly supervise the activities of an organization. ✔✔Board of Directors A legal contract that governs the relationship between a firm and its bondholders.Go To ✔✔Bond Indenture A person who loans a corporation money by buying debt securities.Go To ✔✔Bondholders An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources.Go To ✔✔Business Finance The reduction in sales of a company's own products due to introduction of another similar product.Go To ✔✔Cannibalization A financial asset that can be used by a firm or individual. Examples of capital may be machinery or cash held by a firm.Go To ✔✔Capital A model used to determine the risk-return relationship for an asset.Go To ✔✔Capital Asset Pricing Model (CAPM) The process of evaluation and planning for purchases of long-term assets.Go To ✔✔Capital Budgeting Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment.Go To ✔✔Capital Budgeting Criteria The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.Go To ✔✔Capital Investment A type of financial market used for long-term assets that are held for greater than one year.Go To ✔✔Capital Markets The mixture of debt and equity used to finance a firm.Go To ✔✔Capital Structure When a limited amount of funds are available.Go To ✔✔Capital-constrained Environment A plan for controlling cash inflows and outflows business to balance income with expenditures.Go To ✔✔Cash Budgets Managing the day-to-day finance operations of a firm.Go To ✔✔Cash Management Ensure that a nation's economy remains healthy by controlling the amount of money circulating in the economy.Go To ✔✔Central Banks A type of stock that represents equity in a firm and confers the right to vote at shareholder meetings.Go To ✔✔Common Stock Finding a future value given a present value.Go To ✔✔Compounding The interest on the principal plus the interest on earned interest.Go To ✔✔Compounding Interest A debt instrument that is issued by a corporation in order to raise capital.Go To ✔✔Corporate Bonds The system of rules, practices, and processes by which a firm is directed and controlled.Go To ✔✔Corporate Governance The measure of the relationship between two variables that move in relation to each other.Go To ✔✔Correlation The cost to a firm to use an investor's capital; see interest rate.Go To ✔✔Cost of Capital The stated interest rate of a bond; also known as coupon yield.Go To ✔✔Coupon Rate The stated interest rate of a bond; also known as coupon rate.Go To ✔✔Coupon Yield Statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders.Go To ✔✔Covenants A commercial bank position with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients.Go To ✔✔Credit Analysts Comparing a firm's financial ratios to other firms' ratios or industry averages.Go To ✔✔Crosssectional Analysis A feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay that dividend sometime in the future before paying any common dividends.Go To ✔✔Cumulative What someone would pay right now for an asset.Go To ✔✔Current Market Value A liquidity ratio found by current assets divided by current liabilities.Go To ✔✔Current Ratio A secondary market made up of multiple dealers that hold an inventory of securities and quote prices.Go To ✔✔Dealer Market A financing ratio found by total liabilities divided by total assets.Go To ✔✔Debt Ratio A financing ratios found by total liabilities divided by total equity.Go To ✔✔Debt-to-equity Ratio Failure to meet a debt obligation.Go To ✔✔Default The probability of a loss resulting from a borrower's failure to repay a contractual obligation; also called credit risk.Go To ✔✔Default Risk Companies or securities with beta less than 1.Go To ✔✔Defensive Assets A bond whose price is below its par value.Go To ✔✔Discount Bond The name for interest rate when used in time value of money calculations.Go To ✔✔Discount Rate Finding a present value given a future value.Go To ✔✔Discounting Accounts that do not vary automatically with sales but are left to the discretion of management.Go To ✔✔Discretionary Accounts The additional financing needed given a firm's expectations for future growth.Go To ✔✔Discretionary Financing Needed (DFN) The process of "spreading" your money over many different assets.Go To ✔✔Diversification A model used to evaluate common stock that calculates the value of a share of common stock today by taking the present value of future dividend cash flows.Go To ✔✔Dividend Discount Model A feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to its common stockholders.Go To ✔✔Dividends in Arrears An expanded formula of the return of equity, net margin times total asset turnover times leverage multiplier, which represent the components of profitability, activity (efficiency), and financing.Go To ✔✔DuPont Framework A market in which prices fully reflect all the available information about a specific security.Go To ✔✔Efficient market Everything that a person owns or controls, especially at death.Go To ✔✔Estates An issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint.Go To ✔✔Ethical Dilemma Following accepted standards of moral conduct.Go To ✔✔Ethics A hypothesized estimate of future prices or returns under different scenarios based on expectational data.Go To ✔✔Expected Return Another name for the discretionary financing needed or additional funds needed. It represents the additional financing needed given a firm's expectations for future growth.Go To ✔✔External Financing Needed (EFN) The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.Go To ✔✔Face Value The study of managing and allocating funds at the personal or business level.Go To ✔✔Finance An area of finance that includes firms or organizations that exist to accept a wide variety of deposits, to offer investment products to individuals and businesses, to provide loans, or to broker financial transactions.Go To ✔✔Financial Institutions A person who makes strategic financial decisions in a corporation.Go To ✔✔Financial Managers Incorporating new finance ideas within a firm.Go To ✔✔Financial Policy Implementation Increased volatility in earnings as a result of using debt.Go To ✔✔Financial Risk Risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk.Go To ✔✔Firm-specific Risk An economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate.Go To ✔✔Fisher Effect An activity ratio found by sales divided by fixed assets.Go To ✔✔Fixed Asset Turnover (FAT) An expense that you do not have direct control over and that remains constant from period to period.Go To ✔✔Fixed Expenditures Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year.Go To ✔✔Fixed-income Securities The worth of cash flows in terms of the dollar amount in the relative future.Go To ✔✔Future Value A formula used to value common stock based on the assumptions that dividends are paid every year and grow at constant rate forever.Go To ✔✔Gordon Growth Model A profitability ratio found by gross profit divided by sales.Go To ✔✔Gross Margin Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? ✔✔Bondholders are primarily interested in making sure they will be paid back. Which kind of projects are bondholders interested in? ✔✔Safe projects with a higher chance of providing sufficient compensation What is the third step in finding a solution to an ethical dilemma? ✔✔Consider all stakeholders involved How can agency costs be mitigated? ✔✔Aligning managers' interests with shareholders' interests Why might a manager manipulate accounting procedures? ✔✔To make the company's performance look good Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take? ✔✔Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years. What does the term legal describe? ✔✔An action that is in accordance with the laws and rules set by an authority. Which area of finance involves deciding which assets to invest in to create wealth in the future? ✔✔Investments What is the main goal of a firm? ✔✔To maximize owner wealth What are financial managers doing if they evaluate whether it is worth spending money on research and development for a new product? ✔✔Making an investment decision Which type of financial market is where securities such as stocks and bonds are traded after their initial issuance? ✔✔The secondary financial market What type of financial institution is an insurance company? ✔✔Contractual Which financial institution invests funds contributed by a company to provide retirement funds for the company's employees? ✔✔Pension fund Personal income is which type of economic indicator? ✔✔Coincident Which term refers to something that conforms with accepted standards of conduct that guide a person's behavior? ✔✔Ethical What is the second step in finding a solution to an ethical dilemma? ✔✔Consider alternative courses of action How can agency problems be reduced through corporate control? ✔✔Executive compensation What are the main services offered by financial institutions? ✔✔Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions What is the main objective of personal financial goals? ✔✔To maximize individual utility Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? ✔✔Making financing decisions Why is understanding the definition of finance important in managing personal finances? ✔✔It helps individuals compare the costs and benefits of an action to determine whether to take that action. In which type of market would a company issue bonds or stocks for the first time? ✔✔Primary market Which type of financial institution is a mutual fund? ✔✔Investment institution Which financial institution specializes in managing and administering retirement funds? ✔✔Pension funds Which type of economic indicator is the consumer price index? ✔✔Lagging indicator What does the term ethical refer to? ✔✔The accepted standards of conduct that guide a person's behavior A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? ✔✔Agency problem due to conflicting interests Generating cash or stock from the sales or IPO of companies in the portfolio of investments.Go To ✔✔Harvest The return over the entire period that an investor owns a financial security.Go To ✔✔Holding Period Return The required rate of return that a company expects to earn in order to consider a project.Go To ✔✔Hurdle Rate A security that has some elements that resemble equity and others that resemble debt.Go To ✔✔Hybrid Security Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or nonsystematic risk.Go To ✔✔Idiosyncratic Risk Risk Cash flows that result from accepting a project.Go To ✔✔Incremental Cash Flows The rate at which the average price level of a basket of chosen goods and services in an economy increases over a period of time.Go To ✔✔Inflation When a privately held company first offers shares of stock to outside investors to raise capital, therefore becoming a publicly owned company.Go To ✔✔Initial Public Offering (IPO) Charge premiums to invest in bonds and stocks to pay claims.Go To ✔✔Insurance Companies The percentage of the principal that a lender charges a borrower for the use of assets.Go To ✔✔Interest Rate The probability that changes in interest rates will impact the value of a bond.Go To ✔✔Interest Rate Risk The rate of return that a firm earns on its capital projects.Go To ✔✔Internal Rate of Return (IRR) The value of an asset as determined through fundamental analysis without referring to the asset's market value.Go To ✔✔Intrinsic Value An activity ratio found by COGS divided by inventory.Go To ✔✔Inventory Turnover A financial intermediary that offers complex financial transactions such as underwriting, facilitating mergers, and buying and selling financial securities on behalf of large institutions.Go To ✔✔Investment Bank An area of finance that involves deciding which assets to invest in to create wealth in the future.Go To ✔✔Investments Following the laws and rules set by an authority.Go To ✔✔Legal Another name for debt or liability.Go To ✔✔Leverage A category of ratios that consider how a firm is financed.Go To ✔✔Leverage Ratios An asset that can be converted into cash quickly without the loss of significant value.Go To ✔✔Liquid Asset The ability to turn financial securities into cash easily without losing significant value.Go To ✔✔Liquidity A category of ratios that measure a firm's ability to meet short-term obligations.Go To ✔✔Liquidity Ratios The current market value of a publicly traded company's total outstanding shares, indicating the size of a company.Go To ✔✔Market Capitalization A category of ratios that are used to evaluate the current share price of a public firm's stock.Go To ✔✔Market Ratios Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or nondiversifiable risk.Go To ✔✔Market Risk A market ratio found by market value of equity divided by book value of equity.Go To ✔✔Market-to-book Ratio (M/B Ratio) The business function responsible for generating sales.Go To ✔✔Marketing The date at which a bond expires.Go To ✔✔Maturity Date A type of financial market used for short-term assets that are held for less than one year.Go To ✔✔Money Market Following one's standards of right and wrong behavior.Go To ✔✔Morals An investment company that continually offers investments and buys financial securities and instruments on behalf of investors.Go To ✔✔Mutual Fund When two or more events do not coincide.Go To ✔✔Mutually Exclusive A computer network where stocks are bought and sold. It is the second-largest stock exchange in the world. Typically, technology-related companies will go public through this exchange.Go To ✔✔NASDAQ A bond covenant that describes things the company pledges itself not to do in order to protect bondholders.Go To ✔✔Negative Covenants The percentage of sales remaining after all costs have been deducted from a company's total sales. Also known as net profit margin; indicates the profit earned by the firm.Go To ✔✔Net Margin A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world.Go To ✔✔New York Stock Exchange (NYSE) The rate at which invested money grows for a certain period of time.Go To ✔✔Nominal Rate Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or systematic risk.Go To ✔✔Nondiversifiable Risk Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or idiosyncratic risk.Go To ✔✔Nonsystematic Risk An activity ratio found by operating income divided by total assets.Go To ✔✔Operating Income Return On Investment (OIROI) A profitability ratio found by EBIT profit divided by sales.Go To ✔✔Operating Margin The loss of potential gain from other alternatives when one alternative is chosen.Go To ✔✔Opportunity Cost A series of equal payments made at the end of consecutive periods over a fixed length of time.Go To ✔✔Ordinary Annuity A bond whose price is exactly equal to its par value.Go To ✔✔Par Bond The sum of money that a corporation promises to pay at the expiration of a bond; also called face value.Go To ✔✔Par Value The percent of net income distributed to the shareholders.Go To ✔✔Payout Ratio A financial institution that specializes in managing and administering retirement funds.Go To ✔✔Pension Fund A constant stream of identical cash flows that continues forever.Go To ✔✔Perpetuity A formula used to value preferred stock that is based on the calculation of a perpetuity.Go To ✔✔Perpetuity Model A commercial bank position with the responsibility to find and attract new clients.Go To ✔✔Personal Bankers The percent of net income retained in the firm; also called the retention ratio.Go To ✔✔Plowback Ratio A hybrid security that has no fixed maturity, has fixed payments, and does not confer voting rights on bondholders.Go To ✔✔Preferred Stock A bond whose price is above its par value.Go To ✔✔Premium Bond The worth of cash flows in terms of the dollar amount in the relative past.Go To ✔✔Present Value The potential for the decline in the price of a financial security or an asset relative to the market.Go To ✔✔Price Risk A market ratio found by price per share divided by earnings per share.Go To ✔✔Price-toearnings Ratio (P/E Ratio) The financial market where securities (stocks and/or bonds) are first sold.Go To ✔✔Primary Market A financial institution that invests in an entity that is not publicly listed or traded using money received from institutional investors and wealthy individuals.Go To ✔✔Private Equity Firms that have not issued shares to the public where the ownership rights are privately held.Go To ✔✔Privately Held Companies A financial statement that projects an estimate for future periods "as if" sales grew as predicted.Go To ✔✔Pro Forma Statements The projection of future earnings after all projected costs are subtracted from projected sales.Go To ✔✔Profit Forecasting The ratio of payoff to investment for a proposed project.Go To ✔✔Profitability Index (PI) A category of ratios that are commonly used to directly judge how well management is doing as they strive to maximize owner wealth.Go To ✔✔Profitability Ratios Firms that have issued shares to the public.Go To ✔✔Publicly Traded Firms A liquidity ratios found by current assets less inventory, divided by current liabilities; also called the acid-test ratio.Go To ✔✔Quick Ratio An interest rate that is adjusted to remove the effects of inflation.Go To ✔✔Real Rate The minimum return or compensation an investor requires in order to invest; see interest rate.Go To ✔✔Required Rate of Return The business function responsible for improving and developing services and products.Go To ✔✔Research and Development The percent of net income retained in the firm; also called the plowback ratio.Go To ✔✔Retention Ratio The money gained or lost on an investment over a certain period of time.Go To ✔✔Return A profitability ratio found by net income divided by total assets.Go To ✔✔Return On Assets (ROA) A profitability ratio found by net income divided by owners' equity.Go To ✔✔Return On Equity (ROE) The top line of the income statement. The total amount of money a business brings in (before subtracting any costs).Go To ✔✔Revenues The possibility that the realized or actual return will differ from the expected return.Go To ✔✔Risk A way to manage risk by not performing an activity that may carry risk.Go To ✔✔Risk Avoidance The compensation for the amount of risk taken on by investors.Go To ✔✔Risk Premium A series of techniques that help reduce the amount of risk a person is exposed to by taking a particular action.Go To ✔✔Risk Reduction A decision to take responsibility for a particular risk.Go To ✔✔Risk Retention A risk management technique that involves dispersing assets geographically instead of concentrating them in one location.Go To ✔✔Risk Separation A risk management technique that involves reducing the amount of risk you are exposed to by transferring that risk to another entity.Go To ✔✔Risk Transfer The rate of return on an investment with no risk.Go To ✔✔Risk-free Rate The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).Go To ✔✔Sales Firms whose performance varies according to the season.Go To ✔✔Seasonal Firms The financial market where securities are traded after the initial issuance.Go To ✔✔Secondary Market The process of combining several types of contractual debt (such as mortgages) and reselling them as a package to investors.Go To ✔✔Securitization A person who owns shares of a company's stock.Go To ✔✔Shareholders The interest earned only on the principal.Go To ✔✔Simple Interest A market maker on the NYSE that holds an inventory of securities and acts as a liquidity provider to those that wish to buy and sell.Go To ✔✔Specialist Accounts that vary naturally with sales.Go To ✔✔Spontaneous Accounts Anyone who may be affected by actions taken or a decision made.Go To ✔✔Stakeholder A measure of dispersion of possible outcomes about the mean.Go To ✔✔Standard Deviation The level of growth where four key financial ratios—profitability, asset utilization, leverage, and payout—are constant and where the firm does not need to issue any new equity to fund the growth.Go To ✔✔Steady State Growth Which component of an interest rate is an indicator of inflation and opportunity cost? ✔✔Riskfree rate Which type of interest rate is the rate at which invested money grows for a certain period time? ✔✔Nominal rate What is the compensation for risk given to investors called? ✔✔Risk premium What does the risk-free rate indicate? ✔✔Inflation and opportunity cost What is the inflation rate? ✔✔The rate at which the average price level of a basket of goods and services in an economy increases Why is the required rate of return also known as the hurdle rate? ✔✔It is the minimum rate that a firm must surpass to accept a project. What is the name for the interest rate expressed on an annual basis? ✔✔Annual percentage rate A share of ownership in a company.Go To ✔✔Stock A cost that has already been incurred and cannot be recovered.Go To ✔✔Sunk Costs The growth rate that allows a firm to maintain its present financial ratios without issuing new equity.Go To ✔✔Sustainable Growth Rate (SGR) A group of intermediaries that is used to oversee the issuance of stocks and/or bonds.Go To ✔✔Syndicate Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or nondiversifiable risk.Go To ✔✔Systematic Risk Methods used to minimize the amount of taxes a business pays.Go To ✔✔Tax Strategies An entry-level commercial bank position with the reponsibility to interact with customers at the bank's front desk or drive-through window.Go To ✔✔Teller The idea that money that is available at the present time is worth more than the same amount in the future.Go To ✔✔Time Value of Money (TVM) A financing ratio found by EBIT divided by interest expenses.Go To ✔✔Times Interest Earned (TIE) An activity ratio found by sales divided by total assets.Go To ✔✔Total Asset Turnover (TAT) A bill issued by the U.S. government as a financial security with no interest and a maturity of less than one year; abbreviated T-bill.Go To ✔✔Treasury Bill A note issued by the U.S. government as a financial security with a fixed interest rate and a short maturity between 1 and 10 years; abbreviated T-note.Go To ✔✔Treasury Note A debt instrument (bond) that is issued by the United States government in order to raise capital.Go To ✔✔Treasury Securities Comparing a firm's ratios across time.Go To ✔✔Trend Analysis An arrangement that allows a third party to hold assets on behalf of a beneficiary or beneficiaries.Go To ✔✔Trusts An independent federal government agency that (1) protects investors, (2) maintains fair, orderly, and efficient markets, and (3) facilitates capital formation.Go To ✔✔U.S Securities and Exchange Commission (SEC) Bonds, bills, and notes issued by the U.S. government; considered to be the highest-quality securities available.Go To ✔✔U.S Treasuries The unlimited earnings potential of equity ownership.Go To ✔✔Upside Potential The total satisfaction received from consuming goods and services.Go To ✔✔Utility An expense that you have direct control over and that can change from period to period.Go To ✔✔Variable Expenditures Professional managers of investment capital that typically invest in very young new ventures.Go To ✔✔Venture Capitalists (VCs) A legal expression of an individual's wishes concerning the desposition of his or her property after death.Go To ✔✔Wills The rate of return that investors receive on a bond if they purchase a bond today at the market price and hold it until it matures; the required rate of return given the maturity and risk of the bond.Go To Close ✔✔Yield to Maturity (YTM) What are the three different types of annuities? ✔✔Ordinary annuities, annuities due, and perpetuities. What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? ✔✔Ordinary annuity If you invest $10,000 today and then $5,000 each year for the next 5 years into an investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years. What does $39,248.14 represent? ✔✔Future value What is the name for the concept that a dollar today is worth more than a dollar in the future? ✔✔Time value of money You are considering purchasing a house for $250,000. You have two options to finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option requires you to pay more in total interest? ✔✔A 30-year mortgage Why does the time value of money play an important role in financial decision-making? ✔✔Because the benefits of investments received at different times are comparable only when you consider the time value of money Which type of interest rate includes interest on interest in addition to interest on the principal? ✔✔Compound interest What is the rate at which the average price level of particular goods and services in an economy increases over a period of time? ✔✔Inflation rate You signed an apartment contract today. You are going to pay $1,500 at the beginning of each month for the next 12 months, starting today. What type of cash flows is this contract? ✔✔An ordinary annuity What is the term for the return over the entire period that an investor owns a financial security? ✔✔Holding period return What is used to measure total risk? ✔✔Standard deviation What is the term for the risk that changes in interest rates will impact the value of a bond? ✔✔Interest rate risk What is another name for the cost of capital? ✔✔Discount rate What is the name for the minimum rate of return that an investor or lender will accept for investments? ✔✔Required rate of return The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest rate? ✔✔5% Which action reduces the future value of cash flows? ✔✔Receive all cash flows later than expected. How is risk defined in finance? ✔✔The possibility that the realized or actual return will differ from what we expect Which example below is considered a market risk factor? ✔✔An unexpected change in interest rate occurs. 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