Introduction to Finance

Liquidity premium
Compensation for those 
fi nancial debt instruments that cannot easily be 
converted to cash at prices close to their esti-
mated fair market values
Liquidity ratios
Indicate the ability of the fi rm 
to meet short-term obligations as they come due 
Liquidity risk
Likelihood that a bank will be 
unable to meet its depositor withdrawal demands 
and/or other liabilities when they are due
Loan amortization schedule
A schedule of 
the breakdown of each payment between interest 
and principal as well as the remaining balance 
after each payment
Loanable funds theory
Holds that interest 
rates are a function of the supply of and demand 
for loanable funds
Lockbox system
A system in which payments 
are sent to a P.O. Box and processed by a bank 
to reduce collection fl oat
M1 money supply
Consists of currency, 
travelers’ checks, demand deposits, and other 
checkable deposits at depository institutions

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GLOSSARY
615
Option
Financial contract that gives the owner 
the option of buying or selling a particular good 
at a specifi ed price on or before a specifi ed time 
or expiration date
Option premium
The price paid for the option
Option writer
Seller of an option contract
Order bill of lading
Represents the writ-
ten acceptance of goods for shipment by a 
transportation company and the terms under 
which the goods are to be transported to their 
destination
Ordinary annuity
Equal 
payments 
(receipts) 
occur at the end of each time period
Out-of-the-money
An option with zero intrin-
sic value