Glossary of Finance Terms

A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X - Y - Z - 0-9

Real Risk-Free Rate of Interest, k*
The rate of interest that would exist on default-free U.S. Treasury securities if no inflation were expected.
Realized Rate of Return, -k
The return that was actually earned during some past period. The actual return (-k) usually turns out to be different from the expected return (^k).
Red-Line Method
An inventory control procedure in which a red line is drawn around the inside of an inventory-stocked bin to indicate the reorder point level.
Regular, or Simple, Interest
The situation when interest is not compounded, that is, interest is not earned on interest.
Reinvestment Rate Assumption
The assumption that cash flows from a project can be reinvested (1) at the cost of capital, if using the NPV method, or (2) at the internal rate of return, if using the IRR method.
Reinvestment Rate Risk
The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested.
Reinvestment Rate Risk
The risk that a decline in interest rates will lead to a decline in income from a bond portfolio.
Relaxed Current Asset Investment Policy
A policy under which relatively large amounts of cash, marketable securities, and inventories are carried and under which sales are stimulated by a liberal credit policy, resulting in a high level of receivables.
Relevant Cash Flows
The specific cash flows that should be considered in a capital budgeting decision.
Relevant Risk
The risk of a security that cannot be diversified away, or its market risk. This reflects a security's contribution to the riskiness of a portfolio.
Repatriation of Earnings
The process of sending cash flows from a foreign subsidiary back to the parent company.
Replacement Analysis
An analysis involving the decision of whether or not to replace an existing asset with a new asset.
Replacement Chain(Common Life)Approach
A method of comparing projects of unequal lives which assumes that each project can be repeated as many times as necessary to reach a common life span; the NPVs over this life span are then compared, and the project with the higher common life NPV is chosen.
Required Rate of Return, ks
The minimum rate of return on a common stock that a stockholder considers acceptable.
Reserve Borrowing Capacity
The ability to borrow money at a reasonable cost when good investment opportunities arise . Firms often use less debt than specified by the MM optimal capital structure to ensure that they can obtain debt capital later if they need to.
Residual Dividend Model
A model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget.
Residual Value
The value of leased property at the end of the lease term.
Restricted Current Asset Investment Policy
A policy under which holdings of cash, securities, inventories, and receivables are minimized.
Retained Earnings
That portion of the firm's earnings that has been saved rather than paid out as dividends.
Return on Common Equity (ROE)
The ratio of net income to common equity; measures the rate of return on common stockholders' investment.
Return on Total Assets (ROA)
The ratio of net income to total assets.
The process of officially increasing the value of a country's currency relative to other currencies.
Revolving Credit Agreement
A formal, committed line of credit extended by a bank or other lending institution.
In a financial market context, the chance that an investment will not provide the expected return.
The chance that some unfavorable event will occur.
Risk Aversion
Risk-averse investors dislike risk and require higher rates of return as an inducement to buy riskier securities.
Risk Management
Involves the management of unpredictable events that have adverse consequences for the firm.
Risk Premium, RP
The difference between the expected rate of return on a given risky asset and that on a less risky asset.
Risk-Adjusted Discount Rate
The discount rate that applies to a particular risky stream of income; the riskier the project's income stream, the higher the discount rate.

Copyright © South-Western. All Rights Reserved.