Introduction to Finance

Commercial fi nance company
Organiza-
tion without a bank charter that advances funds 
to businesses by discounting accounts receiva-
ble, making loans secured by chattel mortgages 
on machinery or liens on inventory, or fi nanc-
ing deferred-payment sales of commercial and 
industrial equipment
Commercial letter of credit
A bank’s written 
statement to an individual or fi rm guaranteeing 
acceptance and payment of a draft up to a speci-
fi ed sum if the draft is presented according to the 
terms of the letter
Commercial paper
Short-term unsecured 
promissory note issued by a high-credit-quality 
corporation
Common stock
Ownership shares in a cor-
poration
Common-size fi nancial statements
Expres-
ses balance sheet numbers as a percentage of 
total assets and income statement numbers as 
a percentage of total revenue to facilitate com-
parisons between diff erent-sized fi rms
Compensating balance
Requirement that 10 
to 20 percent of a loan be kept on deposit at 
the bank

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GLOSSARY
611
Deposit money
Money backed by the cred-
itworthiness of the depository institution that 
issued the deposit
Depository institutions
Accept deposits 
from individuals and then lend these pooled 
savings to businesses, governments, and indi-
viduals
Depreciation
Devaluing a physical asset over 
the period of its expected life
Depreciation tax shield
Tax reduction 
due to depreciation of fi xed assets; equals the 
amount of the depreciation expense multiplied 
by the fi rm’s tax rate 
Derivative deposit
Occurs when reserves 
created from a primary deposit are made avail-
able to borrowers through bank loans