Financial Terms

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Definition of Utility

Utility Image 1


The measure of the welfare or satisfaction of an investor or person.

Related Terms:

Utility value

The welfare a given investor assigns to an investment with a particular return and risk.

Utility function

A mathematical expression that assigns a value to all possible choices. In portfolio theory the
utility function expresses the preferences of economic entities with respect to perceived risk and expected return.

Indifference curve

The graphical expression of a utility function, where the horizontal axis measures risk and
the vertical axis measures expected return. The curve connects all portfolios with the same utilities according
to g and s .

Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

Market sectors

The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.

Optimal portfolio

An efficient portfolio most preferred by an investor because its risk/reward characteristics
approximate the investor's utility function. A portfolio that maximizes an investor's preferences with respect
to return and risk.


Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

Utility Image 2

mark to market

Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.

attribute-based costing (ABC II)

an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product


The reduction in utility of an inventory item or fixed asset. If it is an
inventory item, then a reserve is created to reduce the value of the inventory by the
estimated amount of obsolescence. If it is a fixed asset, the depreciation method and
timing will be set to approximate the rate and amount of obsolescence.

Replacement cost

The cost that would be incurred to replace an existing asset with one having the same utility.

Replacement Value

Cost of acquiring a new asset to replace an existing asset with the same functional utility.

pre-authorized payment

A system where funds are electronically debited from your account on a specified date by a financial institution (e.g., bill, mortgage or personal loan payments) or perhaps an insurance or an utility company.







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