
Chapter 2: The Financial System
Terms
 overthecounter markets
 flow of funds'moral hazard
 adverse selection
 principalagent problem
 collateralization
 fixedincome securities
 money market
 capital market
 liquidity
 residual claim
 limited liability
 derivatives
 call option
 put option
 forward contracts
 mortgage rate
 commercial loan rate
 unit of account
 maturity
 default risk
 exchange rate
 yield curve
 yield spread
 capital gain
 capital loss
 nominal prices
 real pirces
 nominal interest rate
 indexlinked bonds
 interestrate arbitrage
 productivity of capital goods
 rate of return on capital
 commercial banks
 definedcontribution pension plan
 definedbenefit pension plan
 mutual funds
 investment banks
 marketweighted stock indexes
Concepts
 Functions of the Financial System
 Transferring Resources Across Time and Space
 Managing Risk
Chapter 4: The Basics of Risk
Concepts
 Measuring Risk
 Diversifiable and Nondiversifiable Risk
 Capital Asset Pricing Model
 Arbitrage Pricing Model
 Default Risk
Chapter 7: Riskless Rates and Risk Premiums
Concepts
 Riskfree Rate
 Equity Risk Premium
 Country Risk Premiums
 Implied Equity Risk Premium
 Bond Default Spreads
 What is the right discount rate to use in valuing an asset?
Chapter 8: Estimating Risk Parameters and Costs of Financing
Concepts
 Estimating Historical beta (regression)
 Bottom up beta
 Fundamental Beta
 Cost of debt
 Estimating Default Spreads for the debt
 Estimating Tax Rates
 Capitalizing Operating Leases
 Computing Equity and Debt weights
Chapter 9: Measuring Earnings
Concepts
Chapter 10: Principles of Risk Management
Terms
 hedging
 insuring
 diversifying
 uncertainty
 risk
 risk aversion
 risk management
 risk exposure
 speculators
 hedgers
Concepts
 The appropriateness of a riskmanagement decision should be judged
in the light of the information available at the time the decision is
made.
For example, if you bought theft insurance for your car and your car
didn't get stolen during the policy period, that doesn't make the insurance
purchase a bad decision.
Similarly, if you bought a lottery ticket, and your ticket won, that
doesn't make the lottery ticket purchase a good one.
 The riskiness of an asset or a transaction cannot be assessed in isolation,
without a context.
Chapter 11: Estimating Growth
Concepts
Chapter 12: Closure in Valuation: Estimating Terminal Value
Concepts
Chapter 14: Free Cash Flow to Eauity Discount Models
Concepts
Chapter 18: Earnings Multiples
Concepts
Chapter 19: Book Value Multiples
Concepts
 cash dividend
 exdividend date
 stock dividend
Chapter 20: Revenue Multiples and SsectorSpecific Multiples
Concepts

