Introduction to Finance

Default risk premium
Indicates 
compensa-
tion for the possibility that the borrower will 
not pay interest and/or will not repay principal 
according to the fi nancial instrument’s contrac-
tual arrangements
Defensive activities
Fed activities that con-
tribute to the smooth, everyday functioning of 
the economy
Defi cit economic unit
Spends more money 
than it brings in and must balance its money 
receipts with money expenditures by obtaining 
money from surplus units
Defi cit fi nancing
Aff ects the monetary and 
banking system when the spending rate is 
faster than the collection of taxes and other 
funds
Defi cit reserves
Amount by which a depos-
itory institution’s bank reserves are less than 
required reserves
Degree of combined leverage (DCL)
Per-
centage change in eps that results from a 1 
percent change in sales volume
Degree of fi nancial leverage (DFL)
Measures 
the sensitivity of eps to changes in EBIT
Degree of operating leverage (DOL)
Mea-
sures the sensitivity of operating income to 
changes in the level of output
Delivery 
or
 transmission fl oat
The delay 
in transferring the means of payment from the 
payer (customer) to the payee (the provider of 
the goods or services)
Demand-pull infl ation
An excessive demand 
for goods and services during periods of eco-
nomic expansion relative to supply

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GLOSSARY
Federal funds
Short-term loans, usually 
with maturities of one day to one week, made 
between depository institutions
Federal funds rate
rate on overnight loans 
from banks with excess reserves to banks that 
have defi cit reserves