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Finance Terms Explained

30+ core finance terms in plain English — bonds, interest rates, NPV, WACC, and more. Built for intro finance and corporate finance students.

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A

Annuity
A series of equal payments made at regular intervals, either received or paid out, often used in retirement or loan contexts.
Asset Allocation
The strategy of dividing an investment portfolio among different asset classes (stocks, bonds, cash) to balance risk and return.

B

Bond
A debt security in which an investor loans money to an issuer (government or corporation) in exchange for periodic interest payments and repayment of principal at maturity.

C

Capital Budgeting
The process a company uses to evaluate and decide which long-term investments or projects are worth pursuing.
Capital Structure
The mix of debt and equity a company uses to finance its overall operations and growth.
Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods, causing growth to accelerate over time.
Cost of Capital
The return a company must earn on its investments to satisfy its investors (both debt and equity holders), used as a hurdle rate for evaluating projects.

D

Diversification
Spreading investments across different assets to reduce risk, based on the idea that not all investments will move in the same direction at the same time.
Dividend
A portion of a company's earnings distributed to shareholders, usually in cash or additional shares.
Dividend Yield
A financial ratio showing how much a company pays out in dividends each year relative to its stock price.

E

Efficient Market Hypothesis
The theory that asset prices fully reflect all available information, making it difficult to consistently outperform the market.
Equity Financing
Raising capital by selling shares of ownership in a company, as opposed to borrowing money.

F

Face Value
The nominal value of a bond or stock as stated by the issuer, also called par value; for bonds, it's the amount repaid at maturity.
Future Value
The value of a current asset at a specified date in the future, based on an assumed rate of growth.

H

Hedging
A risk-management strategy used to offset potential losses in one investment by taking an opposite position in a related asset.

I

Interest Rate
The percentage charged by a lender, or earned by an investor, on the principal amount of a loan or investment over a set period.
Internal Rate of Return (IRR)
The discount rate that makes the net present value of a project's cash flows equal to zero, used to evaluate the profitability of potential investments.

L

Leverage
The use of borrowed money to increase the potential return of an investment, which also increases risk.
Liquidity
How quickly and easily an asset can be converted into cash without significantly affecting its price.

M

Market Capitalization
The total market value of a company's outstanding shares, calculated as share price multiplied by the number of shares outstanding.
Mutual Fund
A pooled investment vehicle that collects money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.

N

Net Present Value (NPV)
The difference between the present value of cash inflows and outflows over time, used to determine whether an investment is expected to be profitable.

O

Opportunity Cost
The value of the next best alternative that is given up when a decision is made.

P

Portfolio
A collection of financial investments such as stocks, bonds, and cash held by an individual or institution.
Present Value
The current worth of a future sum of money, discounted back at a specific interest rate.
Prime Rate
The interest rate that commercial banks charge their most creditworthy corporate customers, often used as a benchmark for other loan rates.

R

Risk-Return Tradeoff
The principle that potential return rises with an increase in risk — investors must be compensated for taking on additional risk.

T

Time Value of Money
The concept that a dollar today is worth more than a dollar in the future, because it can be invested to earn returns in the meantime.

U

Underwriting
The process by which an investment bank raises capital for a company or government by issuing new securities.

V

Volatility
A statistical measure of how much the price of an asset fluctuates over time; higher volatility means greater price swings.

W

Weighted Average Cost of Capital (WACC)
The average rate a company is expected to pay to finance its assets, weighted by the proportion of debt and equity in its capital structure.

Y

Yield
The income return on an investment, typically expressed as a percentage of the investment's cost, current market value, or face value.
Yield to Maturity (YTM)
The total return anticipated on a bond if it is held until it matures, accounting for its current price, face value, coupon rate, and time to maturity.

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