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98 Cards in this Set
- Front
- Back
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What are the 4 Main areas of Finance
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Investments, Corporate, Institutions, International
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Which of the 4 main areas is most concerned with political risk?
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International Finance
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A treasurer reports to
A controller reports to |
The CFO (who reports to)
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Management of a short term finances of a firm is called
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working capital management
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The specific mix of long-term debt and equity that a firm chooses is called its
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capital structure
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The process of planning and managing a firm's long-term investments is called
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capital budgeting
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True or False: The debt holders of a firm have no ownership stake in that firm
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True
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True of False: Debtholders have no legal recourse if interest and principal payments are not made
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False
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True of False: the bondholders and shareholders of a corporation vote to elect the board of directors
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False. bond holders do not get to vote
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Why might there be different classes of CS for a company
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ownership of a private company will want to raise money by selling equity so they issue multiple classes, they own the stock with the voting rights, and retain control.
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Normally is it more risky to invest in a firms' debt or equity
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equity is riskier because the debt holders must be paid before the equity holders have any claim to anything
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True of False: Preferred Stock holders to not get to vote to elect the board of directors
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true
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A general partner has
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unlimited liability
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What is important about Bermuda?
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No corporate income tax
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agency problem
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the conflict of interest that may arise when a principal hires an agent, their intentions don't align
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how does the threat of takeover affect the agency problem
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if a company is taken over by another company, normally management is replaced. Therefore managers keep share price high so they are not takenover
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The difference between the bond's face value and its market value
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a bond's face value is the principal amount it pays at maturity. the market value is how much it costs to buy
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If the price of a bond falls, which feature of the bond rises?
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yeild
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What is the difference between a bond's coupon rate and its YTM
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a coupon rate is the percentage of face value that is paid out as annual coupon payments. It does not change. YTM represents an investor's percentage return if she buys the bond at the current market price
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Call option
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gives the option owner the right to buy the stock at the strike price on or before the expiration date
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put option
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give the option owner the right to sell the stock at the strike price on or before the expiration date
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true or false: options are generally less risky than stocks
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false, it is easy for options to have very high returns or very low returns, they are riskier.
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The mix of long term debt and equity that a firm chooses is called
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capital structure
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Who hires the CEO?
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the Board of Directors (hires who?)
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What are the indirect agency costs
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the opportunity costs to the principle that arise when interests dont align
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2 ways that financial intermediaries lower risk for savers
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diversification and expertise. they know which loans are risky and know how to diversify by loaning to many customers
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examples of financial intermediaries
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commercial banks, pension funds, mutual funds, savings and loans, credit unions
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A market facilitator who maintains inventory and stands ready to buy and sell from market participants at any time is a
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dealer
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If you buy a stock and the company receives some of the proceeds from the purchase this is a
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primary market
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Auction market
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most or all of the trades occur between customers
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True or false: A broker facilitates trades but is generally not responsibly for maintaining liquidity
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True
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Which of the following is considered the best measure of overall US stock market returns
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SP 500
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The world's main foreign exchange center is
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in London
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Commodity Market Exchange
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NY Mercantile Exchange, Chicago Exchange, Chicago Board of Trade, National Stock Exchange of India
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Why does the SEC want to ensure equal disclosure of finances
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it would not be fair if investors received information before others
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The Federal Reserve has to maintain price stability and encourage economic growth, what doesnt European Central Bank do?
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Encourage economic growth
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For a given interest rate, which results in a higher FV compound or simple?
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compound
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for a given per-period interest rate and for compounding periods shorter than one year, the APR will always be less than EAR
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True
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What is the general social function of financial intermediaries
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to efficiently allocate savings to its most productive uses (efficiently move money from savers to investors)
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A market facilitator who maintains inventory and stands ready to buy and sell from market participants at any time is called a
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dealer
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A market that generally has no centralized location where trading occurs
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OTC market
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What is the difference between an OTC and an exchange
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exchange has a centralized trading location, OTC does not
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What is the difference between solvency problems and liquidity problems for a firm
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solvency problems are when owners equity gets wiped out due to losses. Liquidity problems are when a firm cannot raise enough cash to cover its short-term obligation
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Securitization
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the pooling and repackaging of financial assets into asset-backed securities that are then sold to investors
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The rule of 72
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the time it takes to double your money is approximately 72/r%
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Credit Default Swaps
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insurance policies against default on a debt obligation
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Pure Discount Loan
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the borrower pays back principal plus interest in one lump sum in the future
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Interest-Only Loan
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the borrower makes periodic interest payments then pays the interest plus principal at maturity
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Amortized Loan
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the borrower must pay back interest plus some principal with every payment
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Sinking Fund
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A fund that the company pays into for partial early retirement of a bond issue
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put bond
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bond that the bondholder can force the company to buy back before maturity
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call provision
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the company can redeem some or all of a bond issue before it matures
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convertible bond
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a bond that the bondholder can convert into common stock
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income bond
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a bond which has coupon payments that depend on the companies income
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The difference between a registered and a bearer form bond
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a bearer from bond has no central registry where an ownership list is kept
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Floating Rate bond
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a bond that has a coupon rate that is tied to an index value, usually so it changes with interest rates
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True or False: investors will demand a higher return from debentures than from secured debt
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True
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If the yeild of a bond is greater than its coupon rate, then how is price related to par value
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price < par value
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What has a higher interest rate risk, short term or a long term bond?
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Long term bonds
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What relationship is represented by the term structure of interest rate
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the relationship between interest rates and time to maturity
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how is the spot rate curve different from the yield curve
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the spot rate curve shows the yields of different maturities of zero coupon bonds, while the yield curve shows yields of different maturities of coupon bonds
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What type of treasury security is always sold at a discount
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T-Bills
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If the interest rates in the economy go down, what will happen to the price of bonds
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they will go up
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What has more interest rate risk, a low coupon rate or a high coupon rate
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lower coupon rate
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What does an inverted yield curve say about the short term versus long term interest rate?
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long term interest rates are lower than short term interest rates
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5 premiums that affect the required return on a bond
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inflation, interest rate risk, default, taxability, liquidity
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Would an investor demand a higher return from a callable bond or a non-callable bond?
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A call option is good for the corporation and bad for investors, so investors would require a higher return with callable bond
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Which type of treasury security has an original maturity between 2 and 10 years
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T-Notes
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Debentures are...
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unsecured
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Will Current yeild under or overstate YTM for premium bonds?
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Overstate
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Rank the following classes of a firm's investors, from first claim on assets to last claim
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Senior debt, Subordinated debt, equity
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What is the relationship between real interest rates, nominal rates and inflation?
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Nominal = real + inflation
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What is the term structure of interest rates?
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shows the relationship between time and YTM
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Collatoral bonds
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secured by financial securities
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When does the constant growth model function best?
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When r is significantly greater than g
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What is the major shortcoming of PE ratios?
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it does not consider the growth rates
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What is the difference between dividend yield and capital gains yield?
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dividend yield is an investors return that is due to the income of the dividends payments. Capital gains yield is the portion of total return due to price appreciation
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If you believe that the market is efficient, what should be the investment strategy?
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diversify and buy and hold
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the expected return of a constant growth stock is equal to
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required return
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At the most basic level, what is the value of any financial asset?
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the present value of expected future cash flows
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Write the equations for Dividend Yield
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D1/P0
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Capital Gains Yield
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(P1-P0)/P0
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What does PE stand for?
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Price dividend by earnings per share
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What does PEG stand for?
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Price dividend by EPS divided by the growth rate
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Describe a situation where the Dividend Discount Model would not work very well for valuing stock
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firm isnt paying dividends, dividends growing at a different rate than revenues
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If the market is efficient, what does that imply about the stock prices in that market
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stock prices should correctly reflect the underlying value of the stocks
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Which major US stock index rose from 100 in 1978 to 5000 in 2000
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Nasdaq
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how long did it take the DOW jones to surpass the 1929 peak
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25 years later
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Which stock struggled to get through 1000
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The Dow Jones
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About how many stocks does a portfolio need to acheive most of the gains from diversificaion
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20 or 30 stocks
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If an Asset has a higher beta than another, what does this mean
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the first asset has more systematic risk, and thus a higher expected return
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in equilibrium in a CAPM environment what will all assets have
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they will all have the same reward risk ratio, BUT not the same expected return or risk
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What is the beta of US treasury bills?
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beta equals zero
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Why is it unsurprising that long-term bonds have higher returns than long term US treasury securities
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corporate bonds are riskier because they might default, where Treasury securities will not default
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What economic phenomenon cause long term government bond returns to exceed 40% in 1983?
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interest rates fell dramatically when the Federal Reserve brought inflation under control. when i-rates dropped, the prices of existing bonds skyrocketed because they became attractive
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Example of systematic risk
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the stock goes down because the economy slides into a recesstion and the whole market goes down
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example of unsystematic risk
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your stock goes down because the company has a manufacturing problem
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What does the beta measures
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the systematic risk or the correlation with the overall market
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