Finance Basic Essay

1807 words - 8 pages

The study of money and how it is used. Finance considers the relationship of money to time and risk. One of the main subsets of finance is the study of credit and banking, as this involves money, time, and risk all together. Finance may deal with personal or corporate issues, such as how will an individual or company acquires the money needed to perform a certain act.

A debt is an obligation to repay an amount you owe. Debt securities, such as bonds or commercial paper, are forms of debt that bind the issuer, such as a corporation, bank, or government, to repay the security holder. Debts are also known as liabilities.

Bond. Bonds are debt securities issued by corporations ...view middle of the document...

Common stockholders are the residual owners of a corporation in that they have a claim to what remains after every other party has been paid. The value of their claim depends on the success of the firm.

Preferred stock
A security that shows ownership in a corporation and that gives the holder a claim prior to the claim of common stockholders on earnings and also generally on assets in the event of liquidation. Most preferred stock issues pay a fixed dividend set at the time of issuance, stated in a dollar amount or as a percentage of par value. Because no maturity date is stipulated, these securities are priced on dividend yield and trade much like long-term corporate bonds. As a general rule, preferred stock has limited appeal for individual investors.

Bearer Stock
A stock that contains no ownership information and whose physical bearer is presumed to be the owner. Bearer stocks may be bought and sold without endorsement. They are quite rare.

A certificate giving the person or company listed a portion of ownership in a stock, mutual fund, or some other investment vehicle. A share is the smallest unit of ownership. They may be bought or sold on or off an exchange.

internal rate of return (IRR)
The rate of discount on an investment that equates the present value of the investment's cash outflows with the present value of the investment's cash inflows. Internal rate of return is analogous to yield to maturity for a bond.

Discount rate
1. The interest rate charged by the Federal Reserve on loans to its member banks. A change in this rate is viewed as a strong indicator of Fed policy with respect to future changes in the money supply and market interest rates. Generally, a rise in the discount rate signals increasing interest rates in the money and capital markets.
2. The rate at which an investment's revenues and costs are discounted in order to calculate its present value.

Present value
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. To determine the present value, each future cash flow is multiplied by a present value factor. For example, if the opportunity cost of funds is 10%, the present value of $100 to be received in one year is $100 x [1/(1 + 0.10)] = $91.

Opportunity Cost of Capital
The difference in return between an investment one makes and another that one chose not to make. This may occur in securities trading or in other decisions. For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the opportunity cost is the difference in their returns. If that person invested $10,000 in Stock A and received a 5% return while Stock B makes a 7% return, the opportunity cost is 2%. One way of conceptualizing opportunity cost is as the amount of money one could have made by making a different investment decision. Importantly, opportunity cost is not a type of risk because there is not a chance of actual loss.


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