Introduction to Finance

613
Hedging
Action taken to reduce risk or 
insure against a possible negative outcome 
High frequency trading (HFT)
Uses 
pow-
erful computers and computer algorithms to 
analyze price patterns, both within and across 
diff erent markets, and to submit trades to 
exchanges in microseconds
High-yield bonds (junk bonds)
With 
ratings 
lower than Baa, bonds that have a substantial 
probability of default
Holding period dollar return
The sum of all 
income received during a time frame plus the 
change in the asset’s price over the time frame
Holding period return
The percent return 
on an investment over any stated time frame
Horizon risk premium or horizon 
spread
Diff erence in return earned by invest-
ing in a longer-term bond that has the same 
credit risk as a shorter-term bond
House brokers (commission brokers)
Act 
as agents to execute customers’ orders for 
securities purchases and sales
Identifi cation stage
Finding potential capital 
investment opportunities and identifying if a 
project involves a replacement decision and/or 
revenue expansion
Implementation stage
Accepted projects 
are executed in a timely fashion; cash outfl ows 
occur as the fi rm invests in the capital budget-
ing project
In-the-money
An option with a positive 
intrinsic value
Income statement
Reports the revenues gen-
erated and expenses incurred by the fi rm over 
an accounting period, such as a quarter or a year
Incremental cash fl ows
Represent the dif-
ference between the fi rm’s after-tax cash fl ows 
with the project and the fi rm’s after-tax cash 
fl ows without the project
Independent brokers
Handle the commis-
sion brokers’ overfl ow