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Definition of Risk-free asset
An asset whose future return is known today with certainty.
An asset whose future return is known today with certainty. The risk free asset is
A merger or consolidation in which an acquirer purchases the selling firm's assets.
Yield curve option-pricing models.
Any possession that has value in an exchange.
The ratio of total assets to stockholder equity.
Also called surplus management, the task of managing funds of a financial
Ratios that measure how effectively the firm is managing its assets.
The decision regarding how an institution's funds should be distributed among the
A security that is collateralized by loans, leases, receivables, or installment contracts
Methods of financing in which lenders and equity investors look principally to the
Categories of assets, such as stocks, bonds, real estate and foreign securities.
A bond indenture restriction that permits additional borrowing on if the ratio of assets to
Creditors exchange the debt of one defaulting borrower for the debt of another
A model for determining the required rate of return on an asset.
A firm's investing in assets that are riskier than those that the debtholders expected.
Asset substitution problem
Arises when the stockholders substitute riskier assets for the firm's existing
An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
The ratio of net sales to total assets.
Asset pricing model
A model, such as the Capital asset Pricing Model (CAPM), that determines the required
A firm's productive resources.
A common element of a financial plan that describes projected capital spending and the
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
The risk that the cash flow of an issuer will be impaired because of adverse economic
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and
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.
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
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
Refers to the volatility of returns on international investments caused by events associated
Related: Exchange rate risk
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with
Value of cash, accounts receivable, inventories, marketable securities and other assets that
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
Related: unsystematic risk.
Dynamic asset allocation
An asset allocation strategy in which the asset mix is mechanistically shifted in
In project financing, the risk that the project's output will not be salable at a price that will
Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the
The risk that the ability of an issuer to make interest and principal payments will change because
Exchange of assets
Acquisition of another company by purchase of its assets in exchange for cash or stock.
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
Claims on real assets.
The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
See:diversifiable risk or unsystematic risk.
Long-lived property owned by a firm that is used by a firm in the production of its income.
Fixed asset turnover ratio
The ratio of sales to fixed assets.
Flat price risk
Taking a position either long or short that does not involve spreading.
Force majeure risk
The risk that there will be an interruption of operations for a prolonged period after a
Foreign exchange risk
The risk that a long or short position in a foreign currency might have to be closed out
Free cash flows
Cash not required for operations or for reinvestment. Often defined as earnings before
An exchange rate system characterized by the absence of government intervention. Also known as
Free on board
Implies that distributive services like transport and handling performed on goods up to the
Excess reserves minus member bank borrowings at the Fed.
A follower who avoids the cost and expense of finding the best course of action and by simply
Related: interest rate risk
risk that arises when an issuer has policies concentrated within certain geographic areas,
The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.
Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
Also called purchasing-power risk, the risk that changes in the real return the investor will
The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.
A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual
Interest rate risk
The risk that a security's value changes due to a change in interest rates. For example, a
asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
Value of property, equipment and other capital assets minus the depreciation. This is an
Limitation on asset dispositions
A bond covenant that restricts in some way a firm's ability to sell major assets.
Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The
risk that cannot be diversified away. Related: systematic risk
The risk associated with taking applications from prospective mortgage borrowers
Net asset value (NAV)
The value of a fund's investments. For a mutual fund, the net asset value per share
The difference between total assets on the one hand and current liabilities and noncapitalized longterm
A tangible asset with unique physical properties, like a parcel of land, a mine, or a
risk that cannot be eliminated by diversification.
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is
Other current assets
Value of non-cash assets, including prepaid expenses and accounts receivable, due
Overnight delivery risk
A risk brought about because differences in time zones between settlement centers
Policy asset allocation
A long-term asset allocation method, in which the investor seeks to assess an
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
Publicly traded assets
assets that can be traded in a public market, such as the stock market.
Related: inflation risk
Current assets minus inventories.
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a
Regulatory pricing risk
risk that arises when regulators restrict the premium rates that insurance companies
The risk that proceeds received in the future will have to be reinvested at a lower potential
A tangible asset with physical properties that can be reproduced, such as a building or
assets that remain after sufficient assets are dedicated to meet all senior debtholder's claims in full.
Related: unsystematic risk
Return on assets (ROA)
Indicator of profitability. Determined by dividing net income for the past 12 months
Return on total assets
The ratio of earnings available to common stockholders to total assets.
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