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114 Cards in this Set

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  • Back
Affirmative Covenants
Positive covenant where the covenanter binds himself that something has been, or will be done
American Option
An option that can be exercised any time during its life. The majority of exchange traded options are American
Automatic Stay
Provision under the US bankruptcy code prohibiting creditors from beginning or continuing proceedings for collecting owed amounts from a firm that files for protection under Chapter 11
Balloon Payment AKA Balloon Maturity
A final loan payment that is considerably higher than prior payments
Basis Point (BPS)
A unit equal to 1/100th of 1% used in denoting the change in a financial instrument. E.g. Change in Yield of a security
The benchmark return to which the performance of a portfolio or fund manager is compared (e.g. S&P 500)
Bond Covenants use Restrictions on:-
Investment Policy Dividend Policy Financing Policy Required Bonding Activities
Bonus plans
Help the effort problem risk exposure - can provide incentives to stir the pot Makes the payout problem worse Horizon problem not helped because you can manipulate the timing of earnings.
Bonus Plans effect on Horizon Problem
Effect on Horizon problem because the timing of earning can be manipulated
Cafeteria-style Plan
An employee benefit plan that allows staff to choose from a variety of benefits to formulate a plan that best suits their needs
Chapter 11 Chapter 7
11 is court ordered reorganization of finances 7 is liquidation
Closely held firm
salary - higher Bonus - higher options - higher
Consolidated Omnibus Budget Reconciliation Act -A COBRA health plan says if you leave your job you have the right to continue the health insurance coverage you and your family received, for 18 months.
conflicts between owners and managers
effort problem horizon problem risk exposure problem payout problem
Conflicts of interests in Bond contracts
Dividend payouts Claim Dilution Asset Substitution Underinvestment
Constructive Dividends
Cash or other indirect economic benefit paid to the shareholder (often an IRS problem with closely helds)
contracting cost
agency cost
Convertible Bond - Sometimes called CV's
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at bondholder's discretion
Credence Goods company compensation
salary - higher Bonus - higher options - higher
Credit Rating Agencies
A company that rates the ability of a person or a business to pay back a loan. S&P and Moody's Rating is important it affects interest rate
D & O Insurance
Directors and officers insurance is a policy that protects both the personal assets of directors and the company balance sheet from claims and lawsuits for SEC violations, mismanagement, fraud, improper accounting
Unsecured debt - backed only by the integrity of the issuer (no collateral) and documented by an agreement called an indenture
Debenture Bond
An unsecured bond whose holder has a claim on the general creditor on all assets of the issuer. Not secured by a specific asset
Debenture stock
A type of stock that makes fixed payments at scheduled intervals of time. Has the status of equity not debt in liquidation
Debtor in Possession (DIP)
A company that continues to operate while under Chapter 11 bankruptcy process
Defined Benefit Plan
An employer-sponsored retirement plan for which retirement benefits are based upon a formula indicating the exact benefit that one can expect upon retiring. Investment risk is with the company
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative
Dividend Policy
The policy a company uses to decide how much it will pay out to shareholders in dividends
Dividend Units
For each dividend unit the holder has the right to receive payments equal to the dividend paid on a share of stock. Usually granted for a period of time (years)
Divisional performance vs Firm Performance
Where little cooperation is required between autonomous business groups bonus will be biased towards divisional profit. Where cooperation is required on transfer pricing or market pricing to customers firm wide plan will be used.
Dividend reinvestment plans - plan offered by issuing corporation to allow shareholders to reinvest capital gains and cash dividend distributions thereby accumulating stock without brokerage fees. Drawback is no control over timing
due diligence
a meeting with investment bankers and lawyers prior to issuing security
effect on compensation assets in place business versus Growth opportunity business
The more growth opportunity the more compensation and executive will receive and the more it will be conditional on performance. Effect of managers decisions more critical to this type of firm that a high asset maintenance mode type of company.
Equity Carve out
AKA Partial Spin-off. When a parent company sells a minority (usually less than 20%) stake in a subsidiary for an IPO or rights offering
ERISA Employee retirement income security Act1974 Federal law
Requires plans to provide information to participants Provides Fiduciary responsibility for those who manage and control Has been expanded to cover health benefits
Ex Ante
Refers to future events for example future returns or prospects of a company. Ex Ante analysis - assessing future movement in price as a result of a policy
Ex Poste
After the fact - Another term for actual earnings
Exercise Price (or Strike Price)
The price at which the underlying security can be Purchased (call option) or Sold (put option). Determined at the time the option contract is formed (also known as the Strike Price)
Firm Specific Assets
Firm specific assets are assets that can only be used with a particular firm. Like a Holiday Inn Sign - used to bond franchisees commitment with the company/brand
Flotation Costs
The costs of issuing a new security including the money investment bankers earn from the spread plus accounting, legal, printing, etc
Force Majeure Clause
A contract clause that removes liability for natural and unavoidable catastrophes that interrupt the normal course of events and restrict participants from fulfilling obligations
Forward (trade)
An agreement to trade sometime specified time in future and agreed upon price/terms
Free cash flow problem
Issue in high assets in place company where there are limited numbers of positive NPV projects in which to invest. (utilities)
Going Private Transaction
A transaction that reduces the number of shareholders to less than (eliminating the need for the company to file reports with the SEC
Greenmail transactions
A premium paid to a raider to get him/her to terminate a takeover attempt
Growth option companies
salary - higher Bonus - lower options - higher
Higher dividends make
The value of equity go up the value of debt go down This is why banks put loan covenants on firms that restrict the level of dividend payments
Hold Up Problem
Economic term used to describe a situation where two firms do no work to optimum efficiency because of concerns that they lose bargaining power and reduce their own profits
If a stock price goes up the change in the value of the call is
If you increase the value of the equity
The value of the debt increases too (more assets as security for the debt)
Implied Volatility
The estimated volatility of a security's price
Incentive effects of options
Incentive effect of options is greater worth creating volatility than with RSU's
Incentive effects of options
Incentive effect of options is greater wrt creating volatility than with RSU's
Increasing time to maturity
Increases the value of equity Lowers the value of bonds
Increasing volatility
Increases the value of equity Lowers the value of debt because the risk of default increases)
Independent Director
A member of the BOD who has no material with the company. i.e. not affiliated with, employed by, etc
Indication of Interest (IOI)
An underwriting expression showing a conditional nonbinding interest in buying a security that is currently in registration. The broker must provide the investor with a preliminary prospectus
Investment Grade Debt
Debt issued by a firm with a credit rating of BBB or Baa3 or higher. (S&P or Moody's)
Investment opportunities
assets in place Low cost of debt, high benefit of debt, predicted leverage high. Growth opportunity company, high cost of debt, low benefit of debt, predicted leverage low.
Investment Tax Credit
Portion of new capital investment that could be used to reduce a company's tax bill (abolished in 1986)
Joint Venture
The cooperation of two or more individuals or firms each agreeing to share in the profit, loss and control in the specific enterprise
Junk Bond
A high risk non-investment grade bond with a low credit rating (usually BB or lower) as a consequence it usually has a high yield
Large Firm compensation plan
salary - higher Bonus - higher options - higher
Leveraged buyout - Take of a company (or controlling interest) in a company using a significant amount of borrowed money, usually 70% or more of the purchase price
London Interbank Offered Rate -the rate at which banks can borrow funds from other banks. Based on a filtered daily average of the world's most creditworthy banks' intrabank rates
When a business or firm is terminated or bankrupt its assets are sold and the proceeds pay creditors. Any leftovers go to shareholders
Mark to Market
Adjustment of the book value or collateral value of a security to reflect current market value
Modigliani and Miller
If there are no Taxes No contracting costs The firm's investment policy is fixed The value of the firm is independent of its financing policy.
Modigliani and Miller 2
If the choice of capital structure affects the value of the firm then it does so by Changing taxes Changing contracting costs Changing investment incentives
Negative Covenant
A negative covenant is where the party binds himself that has not and will perform certain acts (like take out capital leases)
Non Qualified Stock options
Not taxed on receipt but taxed on exercise
PBGC - Pension Benefit Guarantee Corporation
A non profit group functioning under Dept of Labor that guarantees the payment of certain pension benefits under defined benefit plans that have been terminated with insufficient money to pay benefits
Performance Shares
Shares of stock given to managers on the basis of performance measured on the basis of earnings per share and similar criteria. Used to tie managers interest to shareholders
Performance Units
The right to receive a stock or cash payment from the corporation upon future attainment of specified stock price or completion of vesting period as defined n the plan
Phantom Stock Plan (aka Shadow Stock)
A plan that gives an employee many of the benefits of stock ownership without actually giving them company stock. For example, at the end of the period the appreciation in the value of the stock may be paid to the employee
Poison Pill
A strategy used by corporations to discourage hostile takeover. Make its stock less attractive by either flip in (allow existing shareholder to buy more at a discount) or flip over (stockholder buy acquirers shares at discount after merger)
Product warranty companies compensation
salary - higher Bonus - higher options - higher
Qualified Stock Options
Not taxable when granted or exercised but taxed when sold
Record Date
Date set by the issuing company on which an individual must own shares in order to be eligible for a declared dividend or capital gains distribution. Also used by Nasdaq to set Ex-dividend date
Red Herring Prospectus
A preliminary registration that must be filed with the SEC describing a new issue of stock and prospects from the firm
Regulated firm comp plan
salary - lower Bonus - lower options - lower
Repurchase Stock
Increases leverage
Restricted Stock Plan
Stocks that are issued to insiders (employees) that have certain restrictions on resale placed upon them (see RSU)
Restricted Stock Units (RSU's)
An Russ is a grant in terms of a company units but no stock is issued at the time of the grant. After satisfying a vesting requirement the recipient is issued the shares (employee taxed at vesting)
Restrictions on investments
seldom includes acquisition of physical assets but restricts financial investments disposition of assets (sold as a unit) Security provisions (e.g. collateral) asset maintenance (ship example) restrictions on Mergers
Risk Aversion
Describes an individual who when faced with similar expected returns but slightly different risk will select the lower risk option
Stock Appreciation Rights -works like a stock option. Usually given to employees however the employee doesn't have to pay the exercise price - just collects the amount of the increase in the value of the stock in cash or stocks
Secured Debt
Debt backed or secured by collateral - like a loan on real property
Secured debt Ordinary debt Subordinated debt Equity
secured first claim against assets Ordinary next in line bonds Subordinated next claim after ordinary Equity residual claim
Sell Equity
Lowers leverage
Sinking fund
A fund to which money is added on a regular basis that is used to ensure investor confidence that promised payments will be made. It is used to redeem debt securities or preferred stock issues.
Sinking Fund Requirement
A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity.
Sarbanes Oxley Act of 2002 - an act passed by congress to protect investors from the possibility of fraudulent account activities by corporations
Staggered Board
A board that is organized so that only part of the membership is up for re-election in any one year
Stock appreciation rights
work like non qualified options - bankers and brokers don't get a fee.
Stock option effect on payout problem
Makes it worse because the option holder only has a claim on the capital gain of the stock, not the dividend. It biases managers towards share repurchase
Stock plans vs Bonus
Top managers who set accounting policy are typically compensated with stock based plans. Lower level manager receive bonus based on accounting numbers that allow disaggregation of results. However perverse incentives can be created.
Subordinated debenture bond
An unsecured bond that ranks after secured debt, after debenture bonds and often after some general creditors in its claim on the earnings and assets of the firm.
Subordinated Debt
Debt over which senior debt takes priority. In the event of bankruptcy subordinated debt holder receive payment only after senior debt claims are paid in full
Subordination clause
A provision in a bond indenture that restricts the issuer's future borrowing by subordinating future lender's claims on the firm to those of the existing bondholders
An exchange of streams of payments over time according to specified terms. Most common type is interest rate swap in which one party agrees to pay a fixed interest rate in return for receiving an adjustable rate from the other party
Syndicated Loan
A large loan in which a group of banks work together to provide funds to one borrower. Usually one lead bank syndicates parts of the loan to others
Take a positive NPV project that LOWERS the variance of the future firm value
Value of equity goes up (because of return on positive NPV - not because volatility is reduced) Value of debt goes down.
Tax Loss Carry Back
A tax benefit that allows business losses to be used to reduce tax liability in previous tax years
Tax Loss Carry Forward
A tax benefit that allows business losses to be used to reduce tax liability in subsequent tax years
Time to maturity on a bond
The sooner the bond matures the more value it has
Time to maturity on a bond
The sooner the bond matures the more value it has
Unfunded Pension Benefit
Employer pays amounts to retirees using money from current earnings (no money set aside)
Value creation/ destruction for bondholder through merger
Synergies that add value bond goes up. If leverage goes down risk goes down so bonds go up Dividend goes up , coverage on debt goes down value of bond goes down time to maturity goes up bond goes down
Vertical Integration
The process by which several steps of a manufacturing or distribution process of a product or service is controlled by a single company to increase their power in the market place
The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employees qualified retirement plan account
A measure of risk based on the standard deviation of the asset return.
A certificate entitling the holder to buy a specific amount of securities at a specific price sometime in the future. Warrants are listed on the option exchange and trade independently of the security on which it was issued. (usually Bonds or Preferred Stock)