|risk-adjusted discount rate method
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Definition of risk-adjusted discount rate method
risk-adjusted discount rate method
a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk
the present value of a finite stream of cash flows for every beginning $1 of cash flow.
an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.
an amount or percentage deducted from an equity interest to reflect lack of marketability.
the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.
model for calculating DLOM for minority interests r the discount rate
Schedule of depreciation rates allowed for tax purposes.
Any depreciation method that produces larger deductions for depreciation in the
In portfolio accounting, a straight-line accumulation of capital gains on discount
A strategy that uses available information and forecasting techniques to seek a
Publicly traded issues that may be collateralized by mortgages and MBSs.
The net present value analysis of an asset if financed solely by equity
Money after-tax rate of return minus the inflation rate.
The discount rate that reflects only the business risks of a project and abstracts from the
Swap in which the principal or national amount rises (falls) as interest rates
Annual percentage rate (APR)
The periodic rate times the number of periods in a year. For example, a 5%
Arithmetic average (mean) rate of return
Arithmetic mean return.
Auction rate preferred stock (ARPS)
Floating rate preferred stock, the dividend on which is adjusted every
Average rate of return (ARR)
The ratio of the average cash inflow to the amount invested.
Average tax rate
Taxes as a fraction of income; total taxes divided by total taxable income.
Bank discount basis
A convention used for quoting bids and offers for treasury bills in terms of annualized
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
A strategy in which the maturities of the securities included in the portfolio are concentrated
Base interest rate
Related: Benchmark interest rate.
Basic business strategies
Key strategies a firm intends to pursue in carrying out its business plan.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
Benchmark interest rate
Also called the base interest rate, it is the minimum interest rate investors will
Break-even payment rate
The prepayment rate of a MBS coupon that will produce the same CFY as that of
Break-even tax rate
The tax rate at which a party to a prospective transaction is indifferent between entering
Broker loan rate
Related: Call money rate.
A strategy in which a portfolio is constructed so that the maturities of its securities are highly
The risk that the cash flow of an issuer will be impaired because of adverse economic
A passive investment strategy with no active buying and selling of stocks from the
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
A method of constructing a replicating portfolio in which the manager purchases a
An incentive offered to purchasers of a firm's product for payment within a specified time
A strategy in which a put and with the same strike price and expiration are either both
The risk that a foreign debtor will be unable to pay its debts because of business events,
Related: Unsystematic risk
The risk that a project will not be brought into operation successfully.
A firm engaged in two or more unrelated businesses.
A merger involving two or more firms that are in unrelated businesses.
The acquisition of one firm by anther firm.
Debt obligations issued by corporations.
A legal document creating a corporation.
One of the three areas of the discipline of finance. It deals with the operation of the firm
Corporate financial management
The application of financial principals within a corporation to create and
Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both
Corporate processing float
The time that elapses between receipt of payment from a customer and the
Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes
Corporate taxable equivalent
rate of return required on a par bond to produce the same after-tax yield to
The risk that the other party to an agreement will default. In an options contract, the risk
Country financial risk
The ability of the national economy to generate enough foreign exchange to meet
Country risk General
Level of political and economic uncertainty in a country affecting the value of loans or
In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
Covered call writing strategy
A strategy that involves writing a call option on securities that the investor
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
The interest rate offered on an investment type insurance policy.
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
Refers to the volatility of returns on international investments caused by events associated
The return at which two alternative projects have the same net present value.
Related: Exchange rate risk
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with
Current rate method
Under this currency translation method, all foreign currency balance-sheet and income
Refers to multi-period cash flow matching.
A bond issued with a very low coupon or no coupon and selling at a price far below par
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
Direct estimate method
A method of cash budgeting based on detailed estimates of cash receipts and cash
Referring to the selling price of a bond, a price below its par value. Related: premium.
Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
Present value of $1 received at a stated future date.
The period during which a customer can deduct the discount from the net amount of the bill
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
Non-interest-bearing money market instruments that are issued at a discount and
Facility provided by the Fed enabling member banks to borrow reserves against collateral
Selling something on a discounted basis is selling below what its value will be at maturity,
Discounted cash flow (DCF)
Future cash flows multiplied by discount factors to obtain present values.
Discounted dividend model (DDM)
A formula to estimate the intrinsic value of a firm by figuring the
Discounted payback period rule
An investment decision rule in which the cash flows are discounted at an
Calculating the present value of a future amount. The process is opposite to compounding.
Related: unsystematic risk.
Dividend discount model (DDM)
A model for valuing the common stock of a company, based on the
The fixed or floating rate paid on preferred stock based on par value.
Documented discount notes
Commercial paper backed by normal bank lines plus a letter of credit from a
Dollar-weighted rate of return
Also called the internal rate of return, the interest rate that will make the
In project financing, the risk that the project's output will not be salable at a price that will
Effective annual interest rate
An annual measure of the time value of money that fully reflects the effects of
A measure of the time value of money that fully reflects the effects of compounding.
Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the
Equilibrium rate of interest
The interest rate that clears the market. Also called the market-clearing interest
The risk that the ability of an issuer to make interest and principal payments will change because
The price of one country's currency expressed in another country's currency.
Exchange Rate Mechanism (ERM)
The methodology by which members of the EMS maintain their
Exchange rate risk
Also called currency risk, the risk of an investment's value changing because of currency
The variability of a firm's value that results from unexpected exchange rate changes or the
A type of mortgage pipeline risk that is generally created when the terms of the loan to be
Federal funds rate
This is the interest rate that banks with excess reserves at a Federal Reserve district bank
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