Introduction to Finance

Market timing hypothesis
Firms time the 
market by issuing stock when their stock prices 
are high and repurchasing shares when their 
stock values are low
Market value added (MVA)
Measures 
the 
value created by the fi rm’s managers and equals 
the the market value of the fi rm’s liabilities and 
equity minus the amount of money investors 
paid to the fi rm when these securities were fi rst 
issued
Market value ratios
Indicate the willingness 
of investors to value a fi rm in the marketplace 
relative to fi nancial statement values
Marketable government securities
Secu-
rities that can be purchased and sold through 
customary market channels
Maturity factoring
Firm selling its receiva-
bles is paid on the normal collection date or net 
due date of the account
Maturity risk premium
The added return 
expected by lenders or investors because of 
interest rate risk on instruments with longer 
maturities
Maturity-matching approach
Financing 
strategy that attempts to match the maturities 
of assets with the maturities of the liabilities 
with which they are fi nanced
Medium of exchange
The basic function of 
money
Initial margin
(1) deposited funds necessary 
to purchase a derivatives contract; (2) initial 
equity percentage
Initial public off ering (IPO)
Initial sale of 
equity to the public
Insurance companies
Provide 
fi nancial pro-
tection to individuals and businesses for life, 
property, liability, and health uncertainties
Interest rate
Basic price that equates the 
demand for and supply of loanable funds in the 
fi nancial markets
Interest rate risk
(1) 
refl ects the possibility 
of changes or fl uctuations in market values of 
fi xed-rate debt instruments as market interest 
rates change over time; (2) variations in interest 
expense unrelated to sales or operating income 
arising from changes in the level of interest 
rates in the economy