Introduction to Finance

Derivative securities markets
Where 
fi nan-
cial contracts or instruments that derive their 
values from underlying debt and equity securi-
ties are originated and traded
Derivative security
Financial contract that 
derives its value from the value of another 
asset, such as a bond or stock
Designated market makers (DMM)
As-
signed dealers who have the responsibility of 
making a market in an assigned security 
Development stage
Requires estimating rel-
evant cash infl ows and outfl ows
Deviations
Computed as a periodic return 
minus the average return
Digital currency
Electronic money that serves 
as a medium of exchange for making payments
Direct quotation method
Indicates the 
value of one unit of a foreign currency in terms 
of a home country’s currency
Discount bond
Bond that is selling below 
par value
Discounted loan
Borrower receives the 
principal less the interest at the time the loan is 
made; the principal is repaid at maturity
Discounting
Arithmetic process whereby a 
future value (FV) decreases at a compound inter-
est rate over time to reach a present value (PV)
Discretionary spending
Government 
spend-
ing provided by passage of appropriations bills 
that set aside funds for specifi c federal agencies 
and programs
Dissave
Spend accumulated savings rather 
than further reduce consumption spending
Diversifi cation
Occurs when we invest in sev-
eral diff erent assets rather than just a single one
Dividend payout ratio
(1) dividends per 
share divided by earnings per share (eps); (2) 
the proportion of each dollar of earnings that is 
paid to shareholders as a dividend; equals one 
minus the retention rate