Finance Test 2

Front 1

T Bills

Back 1

short term 1%

Front 2

T-Notes

Back 2

1-10 years

Front 3

T-Bonds

Back 3

Greater than 10 years

Front 4

Euro-Bonds

Back 4

denominated in one currency but sold in another. The US can issue dollar bonds and sell them in Japan

Front 5

Debentures

Back 5

Unsecured bonds- usually a maturity of 10 or more years

Front 6

Subordinated Debt

Back 6

- unsecured “junior” debt
• Debt security has priority

Front 7

Mortgage Bonds

Back 7

secured by property land or buildings

Front 8

Zero Coupon Bond

Back 8

- Bonds that only pay par value at maturity

Front 9

Junk Bonds

Back 9

High Risk Bonds

Front 10

each corporate bond usually has a face value of?

Back 10

$1000 (doesn't need to be stated it is assumed)

Front 11

Coupon

Back 11

stated interest rate made on a bond

Front 12

Coupon rate

Back 12

annual coupon divided by the face value of of the bond

Front 13

face value of bond

Back 13

the principal on the bond that is repaid

Front 14

Yield to Maturity

Back 14

The rate required in the market on a bond

Front 15

Interest rate risk

Back 15

risk that arises from fluctuating interest rates.
1) the longer time to maturity more risk
2) the lower the coupon the more risk because it is more dependent on the face value received at maturity

Front 16

Current yield

Back 16

a bonds annual coupon divided by its price

Front 17

iNDENTURE

Back 17

the written agreement b/w the corporation and the lender detailing the terms of the debt issue.

responsible for managing the sinking fund, terms of the bond, represent the bondholders if there is default

Front 18

Registered form

Back 18

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

Front 19

Bearer form-

Back 19

an alternative to a registered form- the bond is issued without record of the owners name; payment is made to whoever holds the bond

Front 20

Sinking Fund-

Back 20

provision in the bond contract that requires the issuer to retire a portion of the bond issue each year.
1) Call provision- allows the firm to redeem the bonds before maturity on or after the call date (minimum date past which a bond can be callable)

Front 21

How often are coupons paid

Back 21

semiannually

Front 22

What is the bond price formula

Back 22

PV= PV of coupons+ PV of par value

Front 23

On less otherwise stated- par value =$1,000 and coupons are paid semiannually

Back 23

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Front 24

interest paid is tax deductable (debt security), but dividends are taxed (equity security)

Back 24

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Front 25

unpaid debts can lead to assets being confiscated, which is not true for dividends not paid

Back 25

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Front 26

short term debt is within what time period

Back 26

1 year

Front 27

types of debt securities

Back 27

notes, debuntures, bonds

Front 28

two forms of long-term dent; public and private

Back 28

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Front 29

What does seniority mean?

Back 29

preference over other lenders

Front 30

Call premium-

Back 30

the amount by which the call price exceeds the par value of the bond

Front 31

call-protected bond

Back 31

a bond that can not be called

Front 32

Two leading bond-rating firms

Back 32

Moody's and S &P

Front 33

Municipal bonds and notes

Back 33

bonds issued by local and state governments

Front 34

Floating-rate bonds

Back 34

coupon payments are adjustable

Front 35

largest security market in the world

Back 35

US treasury market

Front 36

Bonds Issued far exceeds amount of stocks issued
While a corp. can only have one stock, they can have several bonds issued

Back 36

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Front 37

TRACE

Back 37

Trade Report and Compliance Engine-- bond dealers must provide more info about their bonds

Front 38

what does 136:29 mean

Back 38

the price is $136 ans 29/32

Front 39

Real Rates

Back 39

interest rates or rates of return that have been adjusted for inflation

Front 40

nominal rates

Back 40

interest rates or rates of return that have not been adjusted for inflation

Front 41

1.Nomial rate= 1.realrate*1.inflation rate

Back 41

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Front 42

Term structure-

Back 42

the relationship between maturity and yields

Front 43

Preemptive rights-

Back 43

stockholders may share proportionally in any new stock issues.

Front 44

Preferred stock- (INFO)

Back 44

1) hybrid between debt and equity
2) usually no fixed maturity
3)pays dividends
4)dividends are fixed (like debt)
5) firm can skip dividends, but if they do common stockholders cant get dividends and they are cumulative
6) usually sold in 25, 50 ,100
7)dividends are fixed as either a dollar amount or a percentage of par value.
8) textbook assumes par value is always 100. So, unless otherwise stated it is.

Front 45

Preemptive rights-

Back 45

stockholders may share proportionally in any new stock issues.

Front 46

Preferred stock- (INFO)

Back 46

1) hybrid between debt and equity
2) usually no fixed maturity
3)pays dividends
4)dividends are fixed (like debt)
5) firm can skip dividends, but if they do common stockholders cant get dividends and they are cumulative
6) usually sold in 25, 50 ,100
7)dividends are fixed as either a dollar amount or a percentage of par value.
8) textbook assumes par value is always 100. So, unless otherwise stated it is.

Front 47

Dividend Growth Model:

Back 47

a model that determines the current price of a stock as its current dividend next period divided by the discount rate less the dividend growth rate.

Front 48

Capital Gains Yield

Back 48

the dividend growth rate, or the rate at which the value of an investment grows

Front 49

Cumulative voting

Back 49

directors are elected all at once. (Top 4 vote getters are elected)
-allows for minority election

Front 50

Straight Voting-

Back 50

A procedure in which a director is elected one at a time.
-prevents takeovers
-prevents minorities from coming to power

Front 51

proxy-

Back 51

a grant of authority by a shareholder allowing another individual to vote his or her shares

Front 52

preemptive right

Back 52

the right to share proportionally in any new stock sold

Front 53

dividends- info

Back 53

unless declared, a dividend is not a liability
-dividends are not an expense, it is paid out of profits

Front 54

$5 preferred means

Back 54

a dividend yield of 5%

Front 55

3 cases of estimating dividend (Info

Back 55

1) constant Dividend
2)Constant dividend growth
3) Supernormal Growth

Front 56

Constant Dividends- (INFO)

Back 56

Perpetuity- so sue the Perpetuity formula

Front 57

Constant growth Dividends Formula

Back 57

D0(1+G) raised to the N

Front 58

Supernormal growth dividend Info

Back 58

dividends thta are not easily determined and that change at varying rates for a fixed number of years but at some point in the future the growth becomes normal.

Front 59

What is capital Budgeting?

Back 59

firms are faced with a large number of investment opportunities

Front 60

When using the NPV method of capital budgeting should the project be accepted

Back 60

if the NPV is greater than 0

Front 61

When using the Payback period of capital budgeting should a project be accepted

Back 61

if the projected is paid back sooner than the time limit

Front 62

When using the discounted pay back method should a project be accepted?

Back 62

if the project pays back on a discounted method by a pre-set time limit

Front 63

What is the profitability index measure of capital investing

Back 63

calculates the return per unit

Front 64

When using the profitability index of capital budgeting should a project be accepted?

Back 64

When the profitability index per unit is greater than 1.

useful when investment funds are limited

Front 65

IRR

Back 65

rate of return that makes the present value of the future cash flows equal to the initial costs of the investment.

Front 66

Dividend yield + Capital gains yield

Back 66

Required rate of return