Finance Encyclopedia

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Change of approach. Each card will contain important note and methods of calculation if necessary.

I. Foundational Finance Theory and Corporate Issuers

Time Value of Money (TVM) and Capital Budgeting

• Time Value of Money (TVM)
• Future Value (FV)
• Present Value (PV)
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Modified Internal Rate of Return (MIRR)
• Discount Rate
• Risk-free Rate
• Risk Premium
• Beta (measure of systematic risk)
• Annuity
• Perpetuity
• Present Value of an Annuity (PVA)
• Payback Period (simple capital budgeting metric)
• Discounted Payback Period
• Profitability Index (PI)
• Crossover Rate (relevant when comparing two projects' NPV profiles)
• Effective Annual Rate (EAR)
• Annual Percentage Rate (APR)

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Core Corporate Finance Decisions and Capital Structure

• Weighted Average Cost of Capital (WACC)
• Cost of Equity (e.g., via CAPM: r = Rf + β(Rm – Rf))
• Cost of Debt (after-tax: r_d(1 – T))
• Capital Structure (mix of debt and equity financing)
• Optimal Capital Structure
• Pecking Order Theory
• Trade-off Theory
• Modigliani-Miller Theorems (with/without taxes)
• Working Capital (Current Assets – Current Liabilities)
• Operating Cash Flow (OCF)
• Free Cash Flow (FCF) = OCF – CapEx
• Capital Expenditure (CapEx)
• Dividend Policy (e.g., residual, stable, or constant payout)
• Stock Repurchase / Treasury Stock
• Stock Split & Reverse Stock Split
• Dividend Reinvestment Plan (DRIP)
• Going Public (synonym for IPO)
• Float (public offering from private company)
• Private Placement
• Fully Drawn Advance
• Fixed vs. Floating Interest Rates

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Financial Markets and Instruments

• Primary Market (new securities issuance: IPOs, bond offerings)
• Secondary Market (trading of existing securities)
• Stock Exchange (e.g., NYSE, NASDAQ)
• Over-The-Counter (OTC) Market
• Liquidity (ease and cost of converting asset to cash)
• Market Efficiency (Weak, Semi-Strong, Strong forms)
• Security (equity, debt, derivative)
• Common Stock (Equity)
• Preferred Stock
• Bond (corporate, government, municipal)
• Zero-Coupon Bond
• Convertible Bond
• High-Yield Bond (aka Junk Bond)
• Investment Grade bonds
• Green Bonds, Social Bonds, Sustainability-Linked Bonds
• Index Fund
• Exchange-Traded Fund (ETF)
• Mutual Fund
• Blue-Chip Stock
• Market Capitalization (Large-cap, Mid-cap, Small-cap)
• Equity Capital Markets (ECM)
• Debt Capital Markets (DCM)
• Special Purpose Acquisition Vehicle (SPAC)
• Securitization (e.g., MBS, ABS)
• CUSIP / ISIN (security identifiers)
• Dual Currency Bond
• Private Equity (as market participant)

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II. Fundamental Analysis and Financial Statement Mastery

Financial Statements Architecture

• Income Statement (I/S) – Revenue to Net Income
• Balance Sheet (B/S) – Assets = Liabilities + Shareholders’ Equity
• Cash Flow Statement (CFS) – Operating, Investing, Financing activities
• Revenue (or Sales)
• Cost of Goods Sold (COGS)
• Gross Profit = Revenue – COGS
• Operating Expenses (OpEx) – SG&A, R&D
• EBIT (Earnings Before Interest and Taxes)
• EBITDA (adds back Depreciation & Amortization)
• Net Income
• Non-Controlling Interest (NCI)
• Depreciation (tangible assets)
• Amortization (intangible assets)
• Capitalized Expense vs. Expensed
• Accrual Accounting (vs. Cash Accounting)
• Matching Principle
• Materiality
• Going Concern assumption
• Assets: Accounts Receivable, Inventory, PP&E, Goodwill
• Liabilities: Accounts Payable, Accrued Expenses, Long-term Debt
• Shareholders' Equity: Common Stock, Retained Earnings, Treasury Stock

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Liquidity, Profitability, and Solvency Metrics

• Current Ratio = Current Assets / Current Liabilities
• Quick Ratio (Acid-Test) = (CA – Inventory) / CL
• Cash Ratio = Cash / CL
• Inventory Turnover = COGS / Avg Inventory
• Days Sales Outstanding (DSO) = (AR / Revenue) × 365
• Days Inventory Held (DIH)
• Days Payable Outstanding (DPO)
• Cash Conversion Cycle = DSO + DIH – DPO
• Gross Margin = Gross Profit / Revenue
• Operating Margin = EBIT / Revenue
• Net Margin = Net Income / Revenue
• Return on Assets (ROA) = Net Income / Total Assets
• Return on Equity (ROE) = Net Income / Shareholders’ Equity
• DuPont Analysis (ROE = Net Margin × Asset Turnover × Equity Multiplier)
• Earnings Per Share (EPS) = Net Income / Shares Outstanding
• Debt-to-Equity (D/E) Ratio
• Interest Coverage Ratio = EBIT / Interest Expense
• Leverage (Financial Gearing)
• Free Cash Flow (FCF)

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Valuation and Solvency Ratios

• Price-to-Earnings (P/E) Ratio
• Forward P/E vs. Trailing P/E
• Price-to-Book (P/B) Ratio
• Price-to-Sales (P/S) Ratio
• EV/EBITDA
• EV/Sales
• Dividend Yield = Annual Dividend / Share Price
• Dividend Payout Ratio
• Book Value Per Share
• PEG Ratio (P/E ÷ EPS Growth Rate)

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Valuation Methodologies

• Discounted Cash Flow (DCF) Analysis
• Terminal Value (Gordon Growth or Exit Multiple)
• Terminal Growth Rate
• WACC (discount rate in DCF)
• Multiples Valuation (Comparable Company Analysis – “Comps”)
• Precedent Transaction Analysis (M&A comps)
• Enterprise Value (EV) = Market Cap + Debt – Cash
• Equity Value = Market Capitalization
• Intrinsic Value
• Sum-of-the-Parts (SOTP) Valuation
• Asset-Based Valuation

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III. Investment Banking and Transactional Jargon

Mergers & Acquisitions (M&A) Process

• Mergers & Acquisitions (M&A)
• Target Company
• Acquirer (or Buyer)
• Friendly vs. Hostile Takeover
• Tender Offer
• Due Diligence (financial, legal, operational)
• Synergy (cost or revenue)
• Goodwill (purchase price > fair value of net assets)
• Leveraged Buyout (LBO)
• Divestiture / Spin-off / Carve-out
• Earnout
• Break-up Fee
• Go-Shop / No-Shop Clause

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Capital Markets Groups & Activities

• Equity Capital Markets (ECM)
• Debt Capital Markets (DCM)
• Initial Public Offering (IPO)
• Follow-on Offering / Secondary Offering
• Private Placement
• Underwriting (firm commitment vs. best efforts)
• Book Building
• Roadshow
• Lock-up Period
• Syndication (loan or bond)
• Origination (client coverage)
• Structuring (deal design)
• Advisory Services

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Investment Banking Categories

• Bulge Bracket Investment Banks (e.g., Goldman Sachs, JPMorgan)
• Middle Market Investment Banks
• Boutique Investment Banks (industry- or product-focused)
• Elite Boutiques (e.g., Evercore, Lazard)

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IV. Banking, Risk Management, and Regulatory Compliance

Financial Risk Typology

• Credit Risk (borrower default)
• Market Risk (price volatility: equities, rates, FX, commodities)
• Liquidity Risk (inability to meet short-term obligations)
• Operational Risk (fraud, systems failure, human error)
• Compliance Risk (regulatory breaches)
• Legal Risk
• Reputational Risk
• Systemic Risk (collapse of entire financial system)
• Sovereign Risk (government default)
• Counterparty Risk (default by trading partner)
• Model Risk (errors in valuation/risk models)

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Core Banking and Regulatory Frameworks

• Central Bank (e.g., Federal Reserve, ECB)
• Reserve Requirement
• Deposit Insurance (e.g., FDIC up to $250k)
• Interest Rate Spread (Net Interest Margin)
• Basel Committee on Banking Supervision (BCBS)
• Basel III / Basel IV (capital, leverage, liquidity rules)
• Capital Adequacy Ratio (CAR)
• Risk-Weighted Assets (RWA)
• Liquidity Coverage Ratio (LCR)
• Net Stable Funding Ratio (NSFR)
• Know Your Customer (KYC)
• Anti-Money Laundering (AML)
• Digital Banking, Online Banking, Mobile Banking
• Challenger Banks (e.g., Chime, Revolut)
• Platform Banking
• Proportionality Principle (tailored regulation by firm size/risk)

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V. Economics for Financial Decision-Makers

Macroeconomic Indicators and Policy

• Gross Domestic Product (GDP)
• Real vs. Nominal GDP
• Inflation Rate (CPI, PPI, Core Inflation)
• Unemployment Rate (U-3, U-6)
• Federal Funds Rate (U.S. policy rate)
• Monetary Policy (interest rates, QE, QT)
• Fiscal Policy (government spending & taxation)
• Open Market Operations
• Business Cycle: Expansion, Peak, Contraction, Trough
• Recession (two consecutive quarters of negative GDP)
• Stagflation (high inflation + high unemployment + low growth)
• Deflation (falling prices)
• Hyperinflation
• Yield Curve (normal, flat, inverted)
• Leading Indicators (e.g., stock prices, building permits)
• Coincident Indicators (e.g., industrial production)
• Lagging Indicators (e.g., unemployment duration)

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Microeconomic Foundations

• Supply and Demand
• Elasticity (price, income, cross-price)
• Opportunity Cost
• Marginal Utility
• Utility Maximization
• Perfect Competition
• Monopoly
• Oligopoly
• Monopolistic Competition
• Game Theory (Nash Equilibrium)
• Comparative Advantage
• Absolute Advantage
• Economies of Scale / Diseconomies of Scale
• Market Failure (externalities, public goods, information asymmetry)
• Invisible Hand (Adam Smith)

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VI. Advanced Fixed Income and Interest Rate Structures

Bond Characteristics and Risk Metrics

• Par Value (Face Value)
• Coupon Rate
• Yield to Maturity (YTM)
• Current Yield = Annual Coupon / Market Price
• Accrued Interest
• Clean Price vs. Dirty Price
• Zero-Coupon Bond
• Callable Bond (Call Provision)
• Puttable Bond
• Convertible Bond
• Credit Rating (Moody’s, S&P, Fitch: Investment Grade vs. High Yield)
• Default Risk
• Reinvestment Risk
• Inflation Risk

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Interest Rate Risk Quantification

• Duration (Macaulay Duration)
• Modified Duration ≈ % price change per 1% yield change
• Effective Duration (for bonds with embedded options)
• Convexity (adjusts for curvature in price-yield relationship)
• Price Value of a Basis Point (PVBP) or DV01
• Key Rate Duration (sensitivity to specific maturities)

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VII. Derivatives, Hedging, and Risk Quantification

Derivative Instruments

• Derivative (value derived from underlying)
• Underlying Asset (stock, index, commodity, rate, etc.)
• Futures Contract (standardized, exchange-traded)
• Forward Contract (custom, OTC)
• Options:
  • Call Option (right to buy)
  • Put Option (right to sell)
• Swaps:
  • Interest Rate Swap
  • Currency Swap
  • Credit Default Swap (CDS)
• Structured Products

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Options Mechanics & Valuation

• Strike Price (Exercise Price)
• Maturity Date (Expiration)
• American vs. European Exercise
• In-The-Money (ITM), At-The-Money (ATM), Out-Of-The-Money (OTM)
• Intrinsic Value vs. Time Value
• Black-Scholes Model (for European options)
• Binomial Option Pricing Model

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Options Greeks (Risk Measures)

• Delta (∂Option Price / ∂Underlying Price)
• Gamma (∂Delta / ∂Underlying Price)
• Vega (∂Option Price / ∂Implied Volatility)
• Theta (∂Option Price / ∂Time)
• Rho (∂Option Price / ∂Interest Rate)

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Hedging and Strategy

• Hedging (reduce risk exposure)
• Speculation (bet on price movement)
• Arbitrage (risk-free profit from mispricing)
• Covered Call, Protective Put, Straddle, Strangle, Spread Strategies

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VIII. Taxation and Compliance

Income Classification and Tax Principles

• Gross Income
• Adjusted Gross Income (AGI)
• Pre-tax Adjustments (e.g., IRA contributions, HSA)
• Standard Deduction vs. Itemized Deductions
• Taxable Income = AGI – Deductions
• Marginal Tax Rate vs. Effective Tax Rate
• Tax Evasion (illegal)
• Tax Avoidance (legal optimization)
• Tax Haven
• Deductible expenses
• Ability-to-Pay Principle
• Benefits Received Principle

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Major Tax Types and Procedures

• Income Tax (individual & corporate)
• Corporate Tax Rate (statutory vs. effective)
• Capital Gains Tax (short-term vs. long-term)
• Dividend Tax (qualified vs. ordinary)
• Payroll Tax (Social Security, Medicare)
• Estate Tax / Gift Tax
• Alternative Minimum Tax (AMT)
• Withholding Tax
• Transfer Pricing (multinational tax compliance)
• BEPS (Base Erosion and Profit Shifting – OECD initiative)
• Tax Liability
• Tax Loss Harvesting

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Cross-Domain Critical Mastery Terms (Tier 1 Summary)

Domain	Key Concepts
Valuation & Corp Fin	WACC, DCF, FCF, EBITDA, Terminal Value, Multiples
M&A & IB	LBO, Synergy, Due Diligence, Precedent Transactions, EV/Equity Value
Banking & Risk	Credit Risk, Liquidity Risk, Basel III, KYC/AML, CAR
Macro	GDP, Yield Curve, Fed Funds Rate, Inflation, Business Cycle
Fixed Income	YTM, Duration, Convexity, Credit Spreads, Callable Bonds
Derivatives	Delta, Vega, Futures, Swaps, Options Greeks, Hedging
Tax	Capital Gains Tax, Effective Tax Rate, Tax Avoidance, BEPS
Accounting	Accruals, Matching Principle, Goodwill, NCI, FCF

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Income Classification and Tax Principles

• Gross Income (total income before adjustments)
• Adjusted Gross Income (AGI)
• Pre-tax Adjustments (e.g., retirement contributions, student loan interest)
• Standard Deduction
• Itemized Deductions
• Taxable Income
• Ability-to-Pay Principle
• Benefits Received Principle

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Major Tax Types and Procedures

• Income Tax (individual and business)
• Corporate Tax
• Capital Gains Tax (profit from asset sales)
• Payroll Tax
• Estate Tax
• Effective Corporate Tax Rate
• Tax Liability
• Compliance issues related to taxation

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Cross-Domain Critical Mastery Terms (Tier 1 Summary)

• WACC (Discount Rate calculation for M&A, Equity Research)
• EBITDA / Free Cash Flow (Proxy for operating cash flow / Intrinsic Valuation input)
• LBO / Acquisition (Investment Banking transaction structure)
• Credit Risk / Liquidity Risk (Banking risk management and Basel III)
• GDP / Yield Curve (Macroeconomic indicators and strategy)
• Modified Duration / Yield to Maturity (Fixed Income interest rate risk)
• Options Delta / Futures Contract (Derivatives risk and hedging)
• AGI / Capital Gains Tax (Tax compliance and M&A structuring)