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116 Cards in this Set
- Front
- Back
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stated interest payment made on a bond
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coupon
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the principal amount of a bond that is repaid at the end of the term
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face value
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the annual coupon divided by the face value of a bond
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coupon rate
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date on which the principal amount of a bond is paid
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maturity
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coupon is constant and paid every year
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level coupon bond
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a bond that sells for its par value
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par value bond
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bond that sells for less than face value
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discount bond
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a bond that sells for more than face value
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premium bond
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risk that arises for bond owners from fluctuating interest rates
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interest rate risk
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Two Variables of Interest Rate Risk?
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1. Time to maturity
2. Coupon rate |
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All other things being equal, the ______ the time to maturity, the _______ the interest rate risk
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longer; greater
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All other things equal, the _____ the coupon rate, the _______ the interest rate risk
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lower; greater
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Best Way to find the Yield to Maturity?
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Trial and Error
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Two Classifications of Securities issued by Corporations?
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1. Equity
2. Debt |
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person or firm making the loan
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creditor
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corporation borrowing the money
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debtor
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3 Main Differences between debt and equity?
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1. Debt is not an ownership interest in the firm
2. The corporation's payment of interest on debt is considered a cost of doing business and is fully tax deductible 3. Unpaid debt is a liability of the firm |
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represents an ownership interest and it is a residual claim
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equity
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the written agreement between the corporation and the lender detailing the terms of the debt issue
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indenture
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the form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record
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registered form
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The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond
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bearer form
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an unsecured debt usually with a maturity of 10 years or more
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debenture
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an unsecured debt, usually with a maturity under 10 years
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note
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an account managed by the bond trustee for early bond redemption
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sinking fund
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an agreement giving the corporation the option to repurchase the bond at a specific price prior to maturity
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call provision
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the amount by which the call price exceeds the par value of the bond
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call premium
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a call provision prohibiting the company from redeeming the bond prior to a certain date
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deferred call provision
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a bond that currently cannot be redeemed by the issuer
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call protected bond
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a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender
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protective covenant
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a bond that makes no coupon payments, and thus is initially priced at a deep discount
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zero coupon bond
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the price a dealer is willing to pay for a security
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bid price
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the price a dealer is willing to take for a security
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asked price
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the difference between the bid price and the asked price
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bid-ask spread
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the price of a bond net of accrued interest; this is the price that is typically quoted
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clean price
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the price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays
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dirty price
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interest rates or rates of return that have been adjusted for inflation
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real rates
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interest rates or rates of return that have not been adjusted for inflation
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nominal rates
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the relationship between nominal returns, real returns, and inflation
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Fisher effect
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the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
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term structure of interest rates
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the portion of a nominal interest rate that represents compensation for expected future inflation
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inflation premium
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the compensation investors demand for bearing interest rate risk
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interest rate risk premium
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A plot of the yields on Treasury notes and bonds relative to maturity
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Treasury yield curve
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the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
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default risk premium
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the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
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taxability premium
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the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
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liquidity premium
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a model that determines the current price of a stock as its dividends next period divided by the discounted rate less the dividend growth rate
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dividend growth model
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a stock's expected cash dividend divided by its current price
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dividend yield
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the dividend growth rate, or the rate at which the value of an investment grows
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capital gains yield
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equity without priority for dividends or in bankruptcy
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common stock
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a procedure in which a shareholder may cast all votes for one member of the board of directors
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cumulative voting
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a procedure in which a shareholder may cast all votes for each member of the board of directors
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straight voting
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Two Basic Effects of Staggering?
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1. Makes it more difficult for a minority to elect a director when there is cumulative voting
2. Makes takeover attempts less likely to be successful |
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a grant of authority by a shareholder allowing another individual to vote that shareholder's shares
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proxy
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4 Rights of Shareholders?
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1. Vote for directors
2. Share proportionally in dividends paid 3. Share proportionally in assets remaining after liabilities have been paid in a liquidation 4. Vote on stockholder matters of great importance, such as a merger |
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payments by a corporation to shareholders, made in either cash or stock
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dividends
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stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
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preferred stock
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the market in which new securities are originally sold to investors
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primary market
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the market in which previously issued securities are traded among investors
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secondary market
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an agent who buys and sells securities from inventory
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dealer
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an agent who arranges security transactions among investors
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broker
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As of 2006, is the owner of a trading license on the NYSE
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member
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NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor
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commission brokers
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an NYSE member acting as a dealer in a small number of securities on the exchange floor
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specialist
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NYSE members who execute orders for commission brokers on a fee basis
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floor brokers
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an electronic NYSE system allowing orders to be transmitted directly to the specialist
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SuperDOT system
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NYSE members who trade for their own accounts, trying to anticipate temporary price fluctuations
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floor traders
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the flow of customer orders to buy and sell securities
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order flow
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a fixed place on the exchange floor where the specialist operates
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specialist's post
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the highest bid quotes and the lowest ask quotes for a security
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inside quotes
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Web sites that allow investors to trade directly with one another
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ECNs
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An interest-only loan
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bond
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amount of money that was borrowed
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par value
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interest rate that is established when bond is issued
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coupon rate
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coupon rate x par value / no. of compounding periods per year
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coupon payment
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justifies how many periods until bond is paid off
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maturity date
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rate of return that you will earn on bond
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yield to maturity
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How is the price of a bond determined?
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PV of future cash flows of asset
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- Not owners
- No voting rights - Payments received - Interest - Principal -Legal recourse for missed payments |
debt
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- Owners of firm
- Voting rights - Payments received - Dividends - Residual Claim - No legal recourse for unpaid dividends |
equity
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risk of bankruptcy
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too much debt
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cannot go bankrupt
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all-equity firm
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Order of Bankruptcy Collection?
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1. Bondholders
2. Shareholders 3. Common Stockholders |
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contract between the company and the bondholders
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bond indenture
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How to determine total amount of bonds issued?
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Total $ Raised / $ par value per bond
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don't need piece of paper
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registered
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ownership is distinguished by physical ownership
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bearer
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What two bond classifications require higher coupon rates?
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1. Debentures
2. Notes |
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Classifications of Bonds by Seniority?
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1. Senior
2. Junior 3. Subordinated |
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- Coupon rate is set close to yield of maturity
- Yield is dependent upon the risk of the bond |
As issue of bond
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Higher coupon rate:
Secured debt or a debenture |
debenture
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Higher coupon rate:
Subordinated debenture or senior debt |
subordinated debenture
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Higher coupon rate:
A bond with a sinking fund or one without |
one without
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Higher coupon rate:
A callable bond or a non-callable bond |
callable bond
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Why do bonds have a grading system?
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measure risk of default
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YTM = Coupon rate
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par value bond
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YTM > Coupon rate
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price < par value; discount bond
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YTM < Coupon rate
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price > par value; premium bond
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True for any financial asset?
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Value (price of asset) is inversely related to rate of return of asset
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largest risk that a bondholder is subjected to
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interest rate risk
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Interest rates up, bond price ____
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down
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deep discount bond
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zero coupon bond
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Why would you ever want to issue zero coupon bonds?
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Restricts the amount of cash that can be spent during the early years of a long-term project
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what you are willing to pay for an asset
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bid price
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what dealer is willing to sell asset for
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ask price
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annual state or quoted rate
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nominal rate of return
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risk-free rate of return + risk premium
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nominal rate of return
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compensates investor for loss of use of $ over set period of time
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real risk-free rate
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compensates investor for loss of purchasing power over set period of time
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inflation premium
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4 Factors affecting required return?
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1. Default risk premium
2. Maturity risk premium 3. Liquidity premium 4. Anything else that affects the risk of the cash flows to the bondholders |
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- The firm will pay a constant dividend forever
- This is like preferred stock - The price is computed using the perpetuity formula |
constant dividend
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The firm will increase the dividend by a constant percent every period
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constant dividend growth
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dividend growth is not consistent initially, but settles down to constant growth eventually
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non-constant growth
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2 Assumptions of Dividend Growth Model?
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1. Dividends are expected to grow at a constant, g, into the foreseeable future
2. R is not equal to g, R is not less than g |
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all open director positions are voted for simultaneously
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cumulative voting
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each individual open director position is voted on separately
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straight voting
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does not generally carry voting rights
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preferred stock
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