Fin 357 Exam 2

Front 1

Coupons

Back 1

Bond Payments (regular interest payments)

Front 2

Face Value or Par Value

Back 2

the amount to be repaid at the end of the loan

Front 3

Coupon Rate

Back 3

annual coupon divided by the face value

Front 4

Maturity

Back 4

number of years until the face value is repaid

Front 5

Yield to Maturity (aka Yield)

Back 5

the interest rate required in the market on a bond is for short

Front 6

Current Yield

Back 6

a bond's annual coupon divided by its price

Front 7

Indenture or deed of trust

Back 7

the written agreement between the corporation (the borrower) and its creditors
indentures include: the basic terms of the bond, the total amount of the bonds issued, the description of property used as security (if any), repayment agreements, call provisions, and details of the protective covenants

Front 8

registered form

Back 8

corporate bonds are registered like this and it means that the company has a registrar who maintains a record of the owner of each of the company's bonds (and any changes in ownership)

Front 9

bearer form

Back 9

the certificate is the basic evidence of ownership. ownership is not otherwise recorded, it comes with attached coupons and to receive payment the owner detaches the coupons and sends them to the company

Front 10

debenture

Back 10

an unsecured bond in which nothing other than the food faith of the company is used to secure the bond

Front 11

note

Back 11

is an unsecured bond with less than 10 years remaining until maturity

Front 12

sinking fund

Back 12

an account managed by the bond trustee for the purpose of repaying the bonds; they are considered less risky. some companies with bonds make payments to the trustee who then uses the money to retire some portion of the bonds. this way the company does not need to come up with as large an amount of cash, when bonds need to be repaid

Front 13

call provision

Back 13

allows the company to repurchase, or "call," part of all of the bond issue at stated prices over a specific period.

Front 14

call premium

Back 14

companies normally pay an amount higher than the face value when they repurchase the bonds this is called..

Front 15

deferred call provision

Back 15

for example a company may be prohibited from calling its bonds for some length of bonds (ex. 10 years)

Front 16

call protected

Back 16

during the time in which a company is prohibited from calling its bonds, the bond is called

Front 17

Protective covenants

Back 17

is that part of the indenture of loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan

Front 18

zero coupon bonds

Back 18

a bond that pays no coupons at all must be offered at a price that is much lower than its state value. acts like a government savings bond

Front 19

bid price

Back 19

represents what a dealer is willing to pay for a security

Front 20

asked price

Back 20

what a dealer is willing to take for a security

Front 21

bid-ask spread

Back 21

it is the difference between the two prices and it represents the dealer's profit

Front 22

clean price

Back 22

accrued interest is deducted from the quoted price to give this price

Front 23

dirty price (aka full or invoice price)

Back 23

the accrued interest is included in the quoted price

Front 24

real rate

Back 24

is the percentage change in how much you can buy with your dollars; have been adjusted for inflation

Front 25

nominal rate

Back 25

percentage change in the number of dollars you have; have not been adjusted for inflation

Front 26

Fisher Effect

Back 26

a rise in the rate of inflation causes the nominal rate to rise just enough so that the real rate of interest is unaffected. in other words, the real rate is invariant to the rate of inflation

Front 27

term structure of interest rates

Back 27

the relationship between short- and long-term interest rates. is tells us what nominal interest rates are on default-free, pure discount bonds of all maturities

Front 28

inflation premium

Back 28

investors demand some compensation for taking the risk of inflation, the extra compensation is called this

Front 29

interest rate risk premium

Back 29

investors demand some compensation for taking the risk of holding a longer bond maturity

Front 30

treasury yield curve

Back 30

based on coupon bond yields is a plot of treasure yields relative to maturity

Front 31

default risk premium

Back 31

companies more likely to declare bankruptcy must pay this...

Front 32

taxability premium

Back 32

investors demand the extra yield on a taxable bond as compensation for the unfavorable tax treatment

Front 33

liquidity premium

Back 33

investors prefer bonds that can easily be sold. those without much demand should rewards investors with this...

Front 34

retention ratio

Back 34

retained earnings/earnings

Front 35

return on equity

Back 35

the return on the firms entire equity, which is the return on the cumulation of all firm's past projects

Front 36

expected dividend yield

Back 36

this is calculated as the expected cash dividend divided by the current price, it is conceptually similar to the current yield on a bond

Front 37

capital gains yield

Back 37

the rate at which the value of the investment grows

Front 38

payout ratio

Back 38

the ratio of dividends/earnings

Front 39

common stock

Back 39

stock that has no special preference either in receiving dividends or in bankruptcy

Front 40

straight voting

Back 40

each shareholder gets votes equaling the number of shares they own and must vote in each election position

Front 41

cumulative voting

Back 41

each shareholder gets votes equaling (# of positions X number of shares owned). all directors are elected at once. if there are 4 positions, then the top 4 vote getters win spots. gives minority shareholders more power

Front 42

Proxy

Back 42

the grant of authority by a shareholder to someone else to vote his/her shares

Front 43

preferred stock

Back 43

it has preferences over common stock in the payment of dividends and in the distribution of corporation assets in the event of liquidation

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primary market

Back 44

new-issue market in which shares of stock are first brought to the market and sold to investors

Front 45

secondary market

Back 45

in this market existing shares are traded amongst investors

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dealer

Back 46

maintains an inventory and stands redy to buy and sell at anytime

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broker

Back 47

brings buyers and sellers together, but does not maintain the inventory

Front 48

commission brokers

Back 48

execute customer orders to but and sell stocks. primary responsibility to customers it to get the best possible prices for their orders

Front 49

specialists

Back 49

each of these people acts as an assigned dealer for a small set of securities aka "market makers" since they are obligated to maintain a fair, orderly market

Front 50

floor brokers

Back 50

are used by commission brokers who are too busy to handle certain orders themselves

Front 51

SuperDOT System (Designated Order Turnaround)

Back 51

allows orders to be transmitted electronically directly to the specialist, this has made floor brokers less important

Front 52

floor traders

Back 52

try to anticipate temporary price fluctuations and profit from them by buying low and selling high. they independently trade for their own accounts

Front 53

order flow

Back 53

means the flow of customer orders to buy and sell stocks

Front 54

specialists post

Back 54

each of the counters at a figure-eight shaped station is this..

Front 55

over-the-counter (OTC) market

Back 55

a securities market largely characterized by dealers who buy and sell securities for their own inventories aka NASDAQ

Front 56

electronic communicatinos network (ECNs)

Back 56

websites that allow investors to trade directly with one another