Tuesday, September 20, 2011

Dictionary of Financial and Business Terms (Part 5)

Asset Any possession that has value in an exchange.

Asset/equity ratio The ratio of total assets to stockholder equity.

Asset/liability management Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

Asset activity ratios Ratios that measure how effectively the firm is managing its assets.

Asset allocation decision The decision regarding how an institution's funds should be distributed among the major classes of assets in which it may invest.

Asset-backed security A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.

Asset-based financing Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset classes Categories of assets, such as stocks, bonds, real estate and foreign securities.

Asset-coverage test A bond indenture restriction that permits additional borrowing on if the ratio of assets to debt does not fall below a specified minimum.

Asset for asset swap Creditors exchange the debt of one defaulting borrower for the debt of another defaulting borrower.

Asset pricing model A model for determining the required rate of return on an asset.

Asset substitution A firm's investing in assets that are riskier than those that the debtholders expected. Asset substitution problem Arises when the stockholders substitute riskier assets for the firm's existing assets and expropriate value from the debtholders.

Asset swap An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to provide a better match with its iabilities.

Asset turnover  The ratio of net sales to total assets.

Asset pricing model A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset.

Assets A firm's productive resources.

Assets requirements A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital.

Assignment The receipt of an exercise notice by an options writer that requires the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

Asymmetry A lack of equivalence between two things, such as the unequal tax treatment of interest expense and dividend payments.

Asymmetric information Information that is known to some people but not to other people.

Asymmetric taxes A situation wherein participants in a transaction have different net tax rates.

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