Cma Exam Part 2 Su 5

Front 1

Bond

Back 1

A formal contractual obligation to pay an amount of money to the holder at a certain date, plus a series of cash interest payments based on a specified percentage.

Front 2

The longer term of a bond the ______ will be the return demanded (yield) by investors to compensate for increased risk

Back 2

higher

Front 3

Advantages of Bonds to the issuer

Back 3

Interest paid on debt is tax deductible.

Front 4

Disadvantages of Bonds to the issuer

Back 4

1. YOU HAVE TO PAY BACK INTEREST AND PRINCIPLE.
2. Because it is a legal obligation to pay back, it raises risk.
3. Long term nature makes it risky.
4. Specific ratios must be kept avove a certain level (dso/dsi)
5. Debt to equity ratio can limit how many bonds can be issued.

Front 5

Term Bond

Back 5

SIngle maturity date at the end of its term.

Front 6

Serial bond

Back 6

matures in stated amounts at regular intervals

Front 7

Variable rate bonds

Back 7

pay interest that is dependent on market conditions.

Front 8

Zero-coupon

Back 8

No stated interest rate
No periodic cash payments
Interest component consists entirely of the bonds discount.

Front 9

Commodity backed bond

Back 9

Payable at prices related to a commodity such as gold.

Front 10

Callable bonds

Back 10

may be repurchased by the issuer at a specified price before maturity

Front 11

Convertible bonds

Back 11

may be converted into equity securities of the issuer at the option of the holder under certain conditions.

Front 12

Mortgage bonds

Back 12

Backed by specific assets, usually real estate.

Front 13

Debentures

Back 13

Backed by the borrowers general credit but not by specific collateral.

Front 14

Registered bonds

Back 14

issued in the name of the holder. Only the registered holder may receive interest and principal payments.

Front 15

Bearer bonds

Back 15

not individually registered. Interest and principle are paid to whomever presents the bond.

Front 16

Subordinated debentures

Back 16

Junior security with claims inferior to those of senior bonds.

Front 17

Second mortgage bonds

Back 17

Junior security with claims inferior to those of senior bonds.

Front 18

Income bonds

Back 18

pay interest contingent on the issuers profitability

Front 19

Revenue bonds

Back 19

issued by governmental units and are payable from specific revenue sources

Front 20

Bond Ratings

Back 20

The higher the rating, the more likely the firm is to make good its commitment to pay interest and principle

Front 21

Investment grade bonds

Back 21

considered safe investments and thus have the lowest yeields

Front 22

Triple-A rated bonds

Back 22

the highest rated bond

Front 23

Non-Investment grade bonds

Back 23

Speculative-grade bonds, high-yield bonds, or junk bonds, carry high risk.

Exploit the tax deductibility of large interest payments.

Front 24

Whats the most important concern to the bond issuer

Back 24

the amount of cash that he will receive from investors on the day the bonds are sold.

Front 25

If the bonds stated rate is higher than the market rate

Back 25

Investors are willing to pay more for the bonds, since their periodic interest payments are higher than those currently available in the market.

Front 26

common stockholders

Back 26

owners of the corporation, and their rights as owners, although reasonably uniform, depend on the laws of the state. where the the firm is incorporated.

Front 27

Advantages to issuing common stock

Back 27

1. Doesn't require fixed dividend
2.No fixed maturity date for repayment of capital
3. Proving equity improves creditworthyness
4. more attractive to investors than debt because it grows in value with the success of the firm.

Front 28

Disadvantages to issuing common stock

Back 28

1.Cash dividends on common stock are not tax-deductible, so its comes from after tax profits.
2. Control is usually diluted as more common stock issued
3. New common stock sales dilute EPS
4. Under writing cots are high
5. too much equity may raise the avg cost of capital of the firm above optimal level.

Front 29

Preemptive rights

Back 29

give common shareholders the right to purchase any additional stock issuances in proportion to their current ownership percentages.

Front 30

A stock's Par Value

Back 30

Represents legal capital.

Arbitrary value assigned before the stock is issued. it represents the maximum liability of a shareholder.

Front 31

Preferred stock

Back 31

hybrid of debt and equity.

It has a fixed charge and increases leverage, but payment of dividents is not an obligation.

Front 32

Advantages to issuing preferred stock

Back 32

It is a form of equity and therefore builds the creditworthiness of the firm.

Control is still held by common shareholders

Superior earnings of the firm are usually still reserved for the common shareholders

Front 33

Disadvantages to issuing preferred stock

Back 33

1.Cash dividends on preferred stock are not deductible as a tax expense and are paid with taxable income. The result is a substantially greater cost relative to bonds.

2. In periods of economic difficulty, dividends in arears create major financial and managerial problems.

Front 34

If the firm goes bankrupt, who has priority (common vs preferred)

Back 34

preferred stockholders.

Front 35

Par value of a preferred stock

Back 35

liquidation value, and percentage of par equals preferred dividend.

Front 36

Options

Back 36

right to demand some action in a future date.

Front 37

exercise of an option

Back 37

performing the action. Always at the discretion of theoption holder.

Front 38

European option

Back 38

An option that can be exercised only on its expiration date

Front 39

American option

Back 39

An option that grants the buyer the right to exercise anytime on or before expiration.

Front 40

exercise price

Back 40

price at which the owner can purchase or sell the asset underlying the option contract.

Front 41

option price

Back 41

amount the buyer pays to the seller to aquire an option.

Front 42

covered option

Back 42

on in which the seller already has possession of the underlying

Front 43

Naked option

Back 43

speculative. The writer does not hold the underlying. he may have to aquire it at an unknown price to satisfy obligation.

Front 44

Index option

Back 44

an option whose underlying asset is a market index. If exercised settlement is made by cash since dilivery is impossible.

Front 45

Long-Term equity anticipation securities

Back 45

examples of long term stock options or index options, with expiration dates up to 3 years away

Front 46

Foreign currency options

Back 46

give the holder the right to buy a specific foreign currency at a designated exchange rate.

Front 47

in the money

Back 47

if the price of the underlying rises above the exercise price.

Front 48

out of the money

Back 48

if the value of the underlying is less than the exercise price of the option.

Front 49

at the money

Back 49

if the value of the underlying is equal to the exercise price of the option.

Front 50

put option

Back 50

gives the buyer the right to sell the underlying asset at a fixed price.

Front 51

in the money for a put option

Back 51

when the price of the underlying falls below the exercise price. This way you get people to buy the underlying at a price higher than that prevailing in the market.

Front 52

out of the money for a put option

Back 52

if the value of the underlying is higher than the exercise price of the option, the option is "out-of-the-money" or not worth exercising.

Front 53

At the money

Back 53

if the value of the underlying is equal to the exercise price of the option, the option is said to be "at the money"

Front 54

put-call parity theorem

Back 54

mathematically depicts the combinations of investment strategies that can be devised using European options (i.e. Those with a single exercise date).

Front 55

What are 2 methods for valuing options

Back 55

1. The Black-Scholes formula for call options
2. The Binomial method

Front 56

What does the buyer of a call option benefit from

Back 56

A low exercise price.

Front 57

What does the user of a put option benefit from

Back 57

a high exercise price

Front 58

An increase in the exercise price of an option results in a _______ in the value of a call option and a _________ i the value of a put option.

Back 58

a decrease in the value of a call option and an increase in the value of a put option.

Front 59

As the price of the underlying increases the value of the _________ also increases.

Back 59

call option

Front 60

The value of a put option will _______ as the price of the unerlying increases.

Back 60

decrease, since there is no advantage in selling at a lower than market price

Front 61

A rise in interest rates will therefore result in a ______ in the value of a call option and a _______ in the value of a put option.

Back 61

fall in the value of a call option and a rise in the value of a put option.

Front 62

The more time passes the

Back 62

riskier any investment is.

Front 63

An increase in the term of an option ( both calls and puts)

Back 63

will result in an increase in the value of the option.

Front 64

An increase in the volatility of the price of the underlying

Back 64

will result in an increase in the value of the option.

Front 65

simple forward contract

Back 65

two parties agree that, at a set future date, one of them will perform and one will pay a specified amount for the performance.

Front 66

The party that has contracted to buy the underlying at a future date

Back 66

Has taken the long position

Front 67

The party that has contracted to deliver the underlying at a future date

Back 67

has taken a short position.

Front 68

INterest rate swaps

Back 68

agreements to exchange interest payments based on one interest structure for payments based on another structure

Front 69

Currency swaps

Back 69

agreements to exchange cash flows denominated in one currency for cash flows denominated in another.

Front 70

Credit default swaps

Back 70

Agreements whereby one of the parties indemnifies the other against default by a third party.

Front 71

Lease

Back 71

long term contractual agreement in which the owner of property allows another party the right to use the property for a stated period in exchange for a stated payment.

Front 72

Capital Lease

Back 72

Purchase and financing arrangement.

Front 73

operating lease

Back 73

Long term rental contract

Front 74

Convertible securities

Back 74

Debt or preferred stock securities that contain a provision allowing the holder to convert the securities into some specified number of common shares after a specified time has elapsed

Front 75

Stock purchase warrant

Back 75

a call option on the corporations common stock. After a specified time has elapsed, the holder of the warrant can exchange the warrant plus a specified amount of awash for some number of shares of common stoke.

Front 76

Retained earnings

Back 76

cumulative accrual basis income of the corporation minus amounts paid out in cash dividends minus amounts reclassified as additional paid-in capital from stock dividends

Front 77

Marginal cost of capital

Back 77

cost to the firm of the next dollar of new capital raised after existing internal sources are exhausted.

Front 78

Cost of new capital

Back 78

the ratio of what the firm must pay to what the firm gets.

Front 79

Cost of new debt (ratio)

Back 79

Annual Interest / Net issue proceeds

Front 80

Cost of new preferred stock

Back 80

Next Dividend / Net issue proceeds

Front 81

Cost of new common stock

Back 81

(Next dividend / Net issue proceeds) + dividend growth rate.