BUSF_A01.qxd

Glossary

Forward (foreign exchange) rate The rate of ex-

change between two currencies where the foreign

exchange transaction is to be contracted immediately,

but delivery of the currency will not take place until

a later date. (p. 412)

Free cash flows The cash flows generated by the

business that are available to the ordinary share-

holders and long-term lenders. This is the net cash

flow from operating activities, less tax and funds laid

out on additional non-current (fixed) assets. (p. 447)

Hard capital rationing This arises where a business’s

capital rationing is caused by an inability to raise the

necessary funds, that is, it is a market-imposed con-

straint. (p. 126)

Hire purchase A form of credit used to acquire a non-

current (fixed) asset. Under the terms of a hire pur-

chase (HP) agreement the buyer pays for the asset by

instalments over an agreed period and takes posses-

sion of it from the outset, but legal ownership of the

asset will not be transferred until the final instalment

has been paid. (p. 244)

Income statement A statement that sets the total

revenues (sales) for a period against the expenses

matched with those revenues to derive a profit or

loss for the period. Also known as the profit and loss

account. (p. 42)

Inflation The tendency for a currency to lose value

over time, so that commodities cost more in terms of

a particular currency as time passes. (p. 120)

Initial public offering A business’s first offer of shares

to the public, usually following its first listing on a

recognised stock market. (p. 225)

Integer programming A technique for identifying

the optimum use of scarce resources that identifies

whole numbers of units of output. (p. 129)

Interest rate parity A theoretical explanation of

relative foreign currency exchange rates. It maintains

that where nominal interest rates differ from one

currency area to another, the ‘spot’ and ‘future’

exchange rates will not be the same, but they will be

linked by the difference in the interest rates. (p. 417)

Interest rate risk The risk, to both borrower and

lender, that during the period of the fixed-interest

loan contract the general level of interest rates may

alter, to the disadvantage of one of the parties.

(p. 238)

Interest rate swaps Arrangements where two busi-

nesses, each with borrowings, one at a fixed rate and

the other at a floating rate, each agree to take on the

other business’s obligation to pay interest. (p. 239)

Internal rate of return An investment appraisal tech-

nique that identifies the return on the investment,

taking precise account of the amount of funds that

are devoted to the investment and for what length of

time. (p. 87)

International Fisher effect A theoretical explanation

of relative foreign currency exchange rates. It main-

tains that the exchange rate between two currencies

will adjust in the light of different rates of inflation

and different interest rates to ensure that real interest

rates will be equivalent in both currency areas.

(p. 416)

Junk bonds Loan notes, usually issued by businesses,

that are rated below investment grade and broadly

represent a risky and speculative investment.

(p. 235)

Law of one price A theoretical explanation of relative

foreign currency exchange rates. It maintains that the

exchange rate between two currencies will ensure

that the same product or service will have the same

equivalent cost in both currency areas. (p. 414)

Linear programming A technique for identifying the

optimum use of scarce resources. (p. 128)

Liquidation Selling off the assets of a business, paying

off the claimants and closing the business down.

(p. 14)

Loan notes Long-term loans made by businesses.

(p. 234)

Management buy-out A divestment device where a

group of managers working in a business buy that

business from the owners. (p. 401)

Market portfolio A portfolio that contains part of all

possible investments that can be made in the world.

(p. 197)

Merger SeeTakeover. (p. 388)

Money market hedge A device to protect against

transaction risk, where foreign currencies are ex-

changed immediately and funds are either borrowed

or lent during the period between the transaction

and the date of receipt or payment of the foreign

currency. (p. 421)

Money terms A cash flow and/or cost of capital

expressed in money terms is increased due to

inflation. Also known as nominal terms. (p. 120)

Net present value An investment appraisal technique

that is based on the cash receipts and payments

associated with a project, discounted according

to how long each cash flow will occur in the future.

(p. 82)

Nominal terms SeeMoney terms. (p. 120)

Nominal value The face value of shares and loan

notes. Also known as par value. (p. 220)

Objective probabilities Probabilities based on infor-

mation from past experience. (p. 159)

Operating cash cycle A measure of the length of

time that elapses between paying suppliers and

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