1.

CAPM
In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically
appropriate required rate of return of an asset, to make decisions about adding assets to a well-
diversified portfolio.
It describes the relationship between systematic risk and expected return for assets, particularly
stocks. CAPM is widely used throughout finance for pricing risky securities and generating
expected returns for assets given the risk of those assets and cost of capital.
For example, imagine an investor is contemplating a stock worth $100 per share today that pays
a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is
riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor
expects the market to rise in value by 8% per year.

ERi=Rf+βi(ERm−Rf) where:
ERi=expected return of investment
Rf=risk-free rate
βi=beta of the investment
(ERm−Rf)=market risk premium

The expected return of the stock based on the CAPM formula is 9.5%:
9.5%=3%+1.3×(8%−3%)

2. CML v/s SML

3. efficient portfolio
An efficient portfolio, also known as an ‘optimal portfolio’, is one that provides that best
expected return on a given level of risk, or alternatively, the minimum risk for a given expected
return. A portfolio is a spread of investment products.
If, given a particular level of risk, the expected returns are not met, or if the risk required to
achieve that expected level of return is too high, it is called an ‘inefficient portfolio’.

efficient portfolio should have a combination of at least two stocks above the minimum variance
portfolio (a portfolio with the lowest possible risk level for the rate of expected return).
4. efficient frontier
efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient"
parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition
that no other portfolio exists with a higher expected return but with the same standard
deviation of return (i.e., the risk).
 Efficient frontier comprises investment portfolios that offer the highest expected return
for a specific level of risk.
 Returns are dependent on the investment combinations that make up the portfolio.
 The standard deviation of a security is synonymous with risk. Lower covariance between
portfolio securities results in lower portfolio standard deviation.
 Successful optimization of the return versus risk paradigm should place a portfolio along
the efficient frontier line.
  Optimal portfolios that comprise the efficient frontier tend to have a higher degree of
diversification.
5. beta coefficient
the beta (β or market beta or beta coefficient) is a measure of how an individual asset moves
(on average) when the overall stock market increases or decreases. Thus, beta is a useful
measure of the contribution of an individual asset to the risk of the market portfolio when it is
added in small quantity. Thus, beta is referred to as an asset's non-diversifiable risk, its
systematic risk, market risk, or hedge ratio. Beta is not a measure of idiosyncratic risk.
6. leverage
Leverage results from using borrowed capital as a funding source when investing to expand the
firm's asset base and generate returns on risk capital. Leverage is an investment strategy of
using borrowed money—specifically, the use of various financial instruments or borrowed
capital—to increase the potential return of an investment.
Leverage can also refer to the amount of debt a firm uses to finance assets.
KEY TAKEAWAYS
 Leverage refers to the use of debt (borrowed funds) to amplify returns from an
investment or project.
 Investors use leverage to multiply their buying power in the market.
 Companies use leverage to finance their assets—instead of issuing stock to raise capital,
companies can use debt to invest in business operations in an attempt to increase
shareholder value.
7. operating leverage
Operating leverage is a cost-accounting formula that measures the degree to which a firm or
project can increase operating income by increasing revenue. A business that generates sales
with a high gross margin and low variable costs has high operating leverage.
KEY TAKEAWAYS
 Operating leverage is used to calculate a company’s break-even point and help set
appropriate selling prices to cover all costs and generate a profit.
 Companies with high operating leverage must cover a larger amount of fixed costs each
month regardless of whether they sell any units of product.
 Low-operating-leverage companies may have high costs that vary directly with their
sales but have lower fixed costs to cover each month.
8. financial leverage
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with
the expectation that the income or capital gain from the new asset will exceed the cost of
borrowing.
In most cases, the provider of the debt will put a limit on how much risk it is ready to take and
indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending,
the financial provider uses the assets as collateral until the borrower repays the loan. In the case
of a cash flow loan, the general creditworthiness of the company is used to back the loan.
9. total leverage (Relation between the leverage and breakeven point)
Total Leverage is defined as the potential use of fixed costs both operating and financial to
magnify the effect of changes in sales on a firm’s earnings per share (EPS). Basically, the total
 leverage is concerned with the relationship between the firm’s sales revenue and earnings per
share (EPS).
10. breakeven point
The Breakeven Point. A company's breakeven point is the point at which its sales exactly cover
its expenses. To compute a company's breakeven point in sales volume, you need to know the
values of three variables: Fixed costs: Costs that are independent of sales volume, such as rent.
11. definition of capital budgeting
12. NPV
13. IRR
14. Profitability index
15. Accounting return
16. Payback period
17. definition of working capital
18. liquidity
19. marketability
20. liquidity v/s profitability
21. net working capital
22. trade credit (terms of trade credit)
23. line of credit
A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. A LOC is an
arrangement between a financial institution—usually a bank—and a client that establishes the
maximum loan amount the customer can borrow.
24. revolving credit
 Revolving credit allows customers the flexibility to access money up to a preset amount,
known as the credit limit.
 When the customer pays down an open balance on the revolving credit, that money is
once again available for use, minus the interest charges and any fees.
 The customer pays interest monthly on the current balance owed.
 Revolving lines of credit can be secured or unsecured.
25. temporary and permanent working capital
Permanent working capital refers to the level of current assets that have to be maintained and
are important for the firm to run its business regardless of the level of operations. Temporary
working capital refers to the working capital which is over & above the permanent working
capital
26. definition of lease
27. Operating lease
28. financial or capital lease
29. third party lease
30. leverage lease
31. net leasing
32. sale and leaseback
33. net advantage of leasing
34. liquidity ratio
35. cash ratio
36. activity ratio
37. profitability ratio
38. leverage ratio
39. capital ratio
40. time interest ratio
The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt
obligations based on its current income.
Times-Interest-Earned = (EBIT or EBITDA)/ (Interest Expense) When the interest coverage ratio is
smaller than one, the company is not generating enough cash from its operations EBIT to meet
its interest obligations.
Example:
Company A’s Operating Income (EBIT) = $100m, Interest Expense = $25m
TIE ratio in $100m divided by $25m, which comes out to 4.0x.
41. capital gearing ratio / multiplier ratio
Capital gearing ratio is the ratio between total equity and total debt; this is a specifically
important metric when an analyst is trying to invest in a company and wants to compare
whether the company is holding a right capital structure or not.
Capital Gearing Ratio = Common Stockholders’ Equity / Fixed
Interest-bearing funds.
 Common Stockholders’ Equity: We will take the shareholders’ equity and deduct the
Preferred Stock (if any).
 Fixed Interest-bearing funds: Here, the list is long. We need to include a lot of
components on which the companies pay interest. For example, we will include long
term loans/debts, debentures, bonds, and preferred stock.

From the ratio, we would be able to understand whether the company’s capital is high
geared or low geared.
Example:
Shareholders’ Equity 300,000, Funds bearing interest 500,000
Capital Gearing Ratio 3:5 (High geared)
From the above ratio, we can conclude that the debt is more prevalent in the capital structure
than shareholders’ equity. Thus, it is highly geared.
42. factoring
Factoring is a financial transaction and a type of debtor finance in which a business sells its
accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will
sometimes factor its receivable assets to meet its present and immediate cash needs.

43. corporate Bond

Corporate bonds are like government bonds except that, as the name implies, they are loans to
companies rather than governments.
44. secured debt
 Secured debt is debt that is backed by collateral to reduce the risk associated with
lending.
  In the event a borrower defaults on their loan repayment, a bank can seize the
collateral, sell it, and use the proceeds to pay back the debt.
 Because loans that are secured have collateral backing them, they are considered less
risky than loans that are unsecured, or that have no collateral backing.
 The interest rate on secured debt is lower than on unsecured debt.
 In the event of a company's bankruptcy, secured lenders are always paid back before
unsecured lenders.
45. securitization
the conversion of an asset, especially a loan, into marketable securities, typically for the purpose
of raising cash by selling them to other investors.
46. private placement
a sale of stocks, bonds, or securities directly to a private investor, rather than as part of a public
offering.
Private placements are relatively unregulated compared to sales of securities on the open
market.
47. Proud funding
48. Subordinate Bond
A bond whose claim on income and assets of the issuer in the event of default or if the issuer
files for bankruptcy is ranked below the claims of other bondholders. A subordinate bond is paid
after other bonds are paid off in the event of a default. Also called subordinate debenture.
49. zero coupon Bond
a bond that is issued at a deep discount to its face value but pays no interest.
50. convertible Bond
In finance, a convertible bond or convertible note or convertible debt (or a convertible
debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can
convert into a specified number of shares of common stock in the issuing company or cash of
equal value. It is a hybrid security with debt- and equity-like features.
51. silent participation of funding
Silent participation is closer in legal form to an equity investment than subordinated or
participating loans. In this form of financing one or more persons take an equity stake in a
company, but without assuming any liability to the company's creditors.
52. Syndicate loan
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and
administered by one or several commercial banks or investment banks known as lead arrangers.
53. preferred stock
stock that entitles the holder to a fixed dividend, whose payment takes priority over that of
common-stock dividends. Also called preference share.
54. hybrid financing
The hybrid financing definition includes characteristics of both debt and equity, two ends within
the financial spectrum, to provide financial security. Hybrid financing is where debt and equity
meet in the middle, offering investors the potential benefits of both.
55. Mezzanine financing
mezzanine financing means higher risk and higher return for banks than debt financing, it makes
it easier for companies to maintain financial soundness and their ratings by reinforcing capital
without issuing shares.
56. venture capital
capital invested in a project in which there is a substantial element of risk, typically a new or
expanding business.
KEY TAKEAWAYS
 Venture capital financing is funding provided to companies and entrepreneurs. It can be
provided at different stages of their evolution, although it often involves early and seed
round funding.
 Venture capital funds manage pooled investments in high-growth opportunities in
startups and other early-stage firms and are typically only open to accredited investors.
 Venture capital has evolved from a niche activity at the end of the Second World War
into a sophisticated industry with multiple players that play an important role in
spurring innovation.
57. Bridge financing
Bridge financing, often in the form of a bridge loan, is an interim financing option used by
companies and other entities to solidify their short-term position until a long-term financing
option can be arranged.
Bridge financing normally comes from an investment bank or venture capital firm in the form of
a loan or equity investment.
Bridge financing is also used for initial public offerings (IPO) or may include an equity-for-capital
exchange instead of a loan.
KEY TAKEAWAYS
 Bridge financing can take the form of debt or equity and can be used during an IPO.
 Bridge loans are typically short-term in nature and involve high interest.
 Equity bridge financing requires giving up a stake in the company in exchange for
financing.
 IPO bridge financing is used by companies going public. The financing covers the IPO
costs and then is paid off when the company goes public.

58. business angle

Business angel – definition and meaning. A business angel or angel investor is a wealthy
individual who invests personal capital in start-up companies. They invest in return for an equity
stake. In other words, when they invest, they obtain a percentage ownership of the start-up
business. A start-up business or start-up company is one that has recently been set up, i.e., it
has just started.