Introduction to Finance

Gross domestic product (GDP)
The 
output 
of goods and services in an economy
Gross private domestic investment 
(GPDI)
Measures fi xed investment in resi-
dential and nonresidential structures, producers’ 
durable equipment, and changes in business 
inventories
Hedge
An action which reduces risk; similar 
to the concept of insurance

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GLOSSARY
M2 money supply
M1 plus highly liquid 
fi nancial assets, including savings accounts, 
small time deposits, and retail money market 
mutual funds (mmmfs)
Maintenance margin
Minimum margin to 
which an investment may fall before a margin 
call will be placed
Mandatory spending
Government 
spending 
on entitlement programs that must be funded 
according to existing law
Margin
The ratio of the investor’s equity 
(own money) to the market value of the security
Margin call
The option of either closing 
out the position or investing additional cash to 
increase the position’s equity or margin
Market interest rate
Interest rate observed 
in the marketplace for a debt instrument
Market order
An order for immediate pur-
chase or sale at the best possible price
Market portfolio
A portfolio that contains 
all risky assets
Market risk premium
The slope of the 
security market line; represents the extra 
expected return from investing in the risky 
market portfolio rather than the risk-free asset
Market segmentation theory
Holds that 
securities of diff erent maturities are not perfect 
substitutes for one another
Market stabilization
Intervention of the 
syndicate to buy back securities to prevent a 
larger price drop