Introduction to Finance

Independent projects
Projects not in direct 
competition with one another
Indirect quotation method
Indicates the 
number of units of a foreign currency needed 
to purchase one unit of the home country’s 
currency
Individual net worth
Sum of an individu-
al’s money, real assets, and fi nancial assets or 
claims against others, less the individual’s debt 
obligations
Industry comparative analysis
Compares 
a fi rm’s ratios against average ratios for other 
companies in the fi rm’s industry
Infl ation
Occurs when a rise or increase in 
the price of goods or services is not off set by 
increases in the quality of those goods and 
services
Infl ation premium
Average infl ation rate 
expected over the life of the instrument
Financial leverage ratios
Indicate the extent 
to which borrowed or debt funds are used to 
fi nance assets, as well as the ability of a fi rm to 
meet its debt payment obligations
Financial management
Involves fi nancial 
planning, asset management, and fund-raising 
decisions to enhance the value of businesses
Financial markets
Physical locations or 
electronic forums that facilitate the fl ow of 
funds among investors, businesses, and gov-
ernments
Financial risk
Variations in income before 
taxes over time because fi xed interest expenses 
do not change when operating income rises or 
falls
Financial system
A complex mix of fi nan-
cial intermediaries, markets, instruments, 
policy makers, and regulations that interact 
to expedite the fl ow of fi nancial capital from 
savings into investments
First mortgage bonds
Backed or secured 
by specifi cally pledged property of a fi rm (real 
estate, buildings, and other assets classifi ed as 
real property)
Fiscal policy
Involves setting the annual 
national budget and refl ects government infl u-
ence on economic activity through taxation and 
expenditure plans