capital gain the increase in the value of an asset through an increase in its price.
capital loss   the decrease in the value of an asset through a decrease in its price.
coupon  the fixed amount that a borrower agrees to pay to the bondholder each year.
debt contract  a contract in which a lender agrees to provide funds today in exchange for a promise from the borrower, who will repay that amount plus interest at some point in the future.
depreciation  the decrease in an asset’s value over time; for capital, it is the amount by which physical capital wears out over a given period of time.
dividend yield  the dividend stated as a percentage of the price of the stock.
earnings  accounting profits of a firm.
economic rent  the price of something that has a fixed supply.
efficient market hypothesis  the idea that markets adjust rapidly enough to eliminate profit opportunities immediately.
equilibrium risk-return relationship  the positive relationship between the risk and the expected rate of return on an asset derived from the fact that, on average, risk-averse investors who take on more risk must be compensated with a higher return.
equity contract  shares of ownership in a firm; payments to the owners of the shares depend on the firm’s profits.
exchange rate  the price of one currency in terms of another in the foreign exchange market.
expected return  the return on an uncertain investment calculated by weighting the gains or losses by the probability that they will occur.
face value  the principal that will be paid back when a bond matures.
foreign exchange market  a market in which one currency (such as Japanese yen) can be exchanged for another currency (such as U.S. dollars).
implicit rental price  the interest payments on the funds borrowed to buy the capital plus the depreciation of the capital over a given period of time.
marginal revenue product of capital  the change in total revenue due to a one-unit increase in capital.
maturity date  the date when the principal on a loan is to be paid back.
portfolio diversification  spreading the collection of assets owned in order to limit exposure to risk.
price-earnings ratio  the price of a stock divided by its annual earnings per share.
purchasing power parity  the theory that exchange rates are determined in such a way that the prices of goods in different countries are the same when measured in the same currency.
rate of return  the return on an asset stated as a percentage of the price of the asset.
rental price of capital  the amount that a rental company charges for the use of capital equipment for a specified period of time.
return  the income received from the ownership of an asset; for a stock, the return is the dividend plus the capital gain.
systematic risk  the level of risk in asset markets that investors cannot reduce by diversification.
yield  the annual rate of return on a bond if the bond were held to maturity.