Finance Glossary
20 essential finance terms with clear definitions, formulas, examples, and common misconceptions.
Discount Rate
The return used to convert future cash flows into present value.
🧮Net Present Value (NPV)
The sum of present values of all cash flows (positive and negative) of a project or investment.
🎯Internal Rate of Return (IRR)
The discount rate that makes a project's NPV equal to zero.
⚖️Weighted Average Cost of Capital (WACC)
The blended cost of a firm's debt and equity, weighted by their market values.
📈Beta (β)
A measure of a stock's sensitivity to overall market movements.
📊Capital Asset Pricing Model (CAPM)
A model that relates expected return to systematic risk via beta.
🛡️Risk-Free Rate
The theoretical return on an investment with zero risk, typically proxied by government bond yields.
💹Market Risk Premium
The excess return investors expect from the market portfolio over the risk-free rate.
💲Cost of Equity
The return shareholders require to compensate for the risk of owning the stock.
🏦Cost of Debt
The effective interest rate a company pays on its borrowings, adjusted for the tax deduction.
♾️Terminal Value
The value of all cash flows beyond the explicit forecast period in a DCF model.
💸Free Cash Flow
Cash generated by operations after reinvestment in the business, available to capital providers.
🏢Enterprise Value
The total value of a firm's operating assets, calculated as market cap plus net debt.
🚧Hurdle Rate
The minimum acceptable rate of return for an investment, often equal to or above WACC.
🔁Annuity
A series of equal payments made at regular intervals over a fixed period.
♾️Perpetuity
An infinite series of equal payments. A growing perpetuity increases at a constant rate.
💵Yield to Maturity (YTM)
The total return earned on a bond if held to maturity, assuming coupons are reinvested at the same rate.
✂️Coupon Rate
The annual interest payment on a bond expressed as a percentage of face value.
📅Amortization
The gradual repayment of a loan through scheduled payments of principal and interest.
🔍Sensitivity Analysis
Testing how changes in key assumptions affect a model's output, often NPV or IRR.
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