Question

Write short notes on the following concepts

1. Payback rule
2. Perpetuity
3. Preferred stocks
4. Primary issue
5. Principle agent problem
6. Profitability index

Answer 1

a-Payback rule- When someone has gone for an investment, there is required time for the recovery of the investment in terms of saving or profits. The required time is called the payback rule and also called the payback period.

b-Perpetuity-

When there is no time limit for continuous cash flow with a specific interval or fixed date is called perpetuity. This is more of theoretical and there are limited real-life examples like house rent. The house owner will continuously receive rent until the property exists.

c-Preferred stocks-

These are hybrid instruments with mixed properties of common stocks. These are also called the preferred share or preference shares as well. Generally preferred stock is a share of ownership in a public company.

d-Primary issue

Primary issue or primary offering is the first issuance of stock by a company for public sale. The Initial Public Offerings (IPOs) are the example of the primary issue.

e-Principle-agent problem

When intermediary or agents take decisions on behalf of others, there arises the conflict of interest. There are enough chances that the agent will work for their own interest and they will create some moral hazards in the scenario. There are chances of being exploited by the agents and the principal may prefer to stay away from the transaction.  

f-Profitability index-

The ratio of payoff to investment is the profitability index. It indicates whether an investment is profitable or not and enables decision making.