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49 Cards in this Set

  • Front
  • Back
1-1: rational investors prefer (2)
1. higher returns
2. lower risk
1-2: A cash flow received sooner is worth ____ than a cash flow received later
1-4: 3 interrelated areas of finance
1. financial markerts and institutions
2. investments
3. managerial (corporate) finance
1-5: Name the 4 main financial institutions and explain them.
-depository: business loans, trust operat., brokerage, insurance
-depository: real estate loans
depository: consumer loans
1-6: name the 4 types of investment companies
1. stock brokerage
3. investment companies
4. insurance companies
1-7 explain the 4 types of managerial finance
-strategic planning, acquisitions, employee incentives
-product introductions, advertising, capital budgeting
-provides data for financial decisions
- provides data for financial decisions
1-8 Descibe the history of financial markets beginning from 1900's.
-early 1900's- full service banks
-loss of confidence during depression (6000 banks
failed): market decrsd > 80%
- 1970's= deregulation (during high inflation & intrst rates)
1-8 What is the Glass-Steagall Act of 1933?
- separated commercial and investment banking
- authorized deposit insurance
what is the SARBANES-OXLEY ACT of 2002?
-est. accountability & responsibility for financial information
-outside directors & independent auditors
-CEO & CFO certify finan. statements.
1-13 Globalization of business allows for...
-better transportation and communication
-lowered trade barriers
-cost of production increased: need new markets
-multinational firms can shift production to w.e. costs the lowest
1-15: what is the job of a financial manager? (2)
1. max value of the firm
2. value= present, or current, value of cash flows an asset is expected to generate in the future
2-1 what is a real asset?
what is a financial asset?
- r.a.= physical, observable, or touchable item
- f.a.= INTANGIBLE asset that represents a promise to distrib cash flows some time in the future
What are the major types of financial instruments? (3)
1. money market instuments
2. capital market instruments
3. derivatives market instruments
what are money market instruments?
t-bill, CD's, eurodollar deposit, money market mutual fund
what are capital market instruments?
Equity (Stock)
-Common Stock
-Preferred Stock

Debt (Bonds)
What are derivatives market instruments?
- options
- futures
- swaps
why do firms issue financial instruments? it can purchase the tangible assets necessary to produce income;

-Common Stock
-Preferred Stock
-Hybrid (convertible)
What is included in the equity part of the balance sheet?
1.Common equity
-Stockholder’s total investment in the firm

2.Par value
-Nominal or face value of a stock or bond

3.Retained earnings
-Earnings the firm has not paid out as dividends throughout its history

4.Additional paid-in capital
-Difference between the value of newly issued stock and its par value
What is debt?
a loan given to an individual, company, or government
Explain the features of debt.
-Priority to assets and earnings

-Principal value = Face value = Par value

-Interest Rate
-Maturity date (The time a note or bill of exchange becomes due)
-Cash flow structure

-No control of the firm (no voting rights)
**Restrictive covenants protect bondholder rights
Short Term Debt. What does it include? order of risk: high to low
1. Treasury Bill (T-bill) – Discount UST obligation

2. Commercial Paper – Discount corporate debt

3. Repurchase Agreement
Sale and repurchase (collateralized loan)

4.Certificate of Deposit – Time deposit at Bank

5.Eurodollar Deposit
Time deposit in non-US bank (denominated in US $)

6. Money Market Mutual Fund
Pooled, managed investments in short-term debt
7.Banker’s Acceptance – Discount bank guarantee
8. Federal Funds – Deposits at Federal Reserve Banks
--Overnight loans between banks to manage reserves
--Loans made at Federal Funds Rate (daily market rate)
What is long term debt?
Term Loans
Private contract between borrower and lender
Speed, flexibility, and low issuance cost

Long-term contract
Borrower agrees to pay bondholders:
Scheduled principal and interest payments
List the bond sectors and explain them (8).
Yankee - Foreign debt issued in US
Municipal bonds – State/local governments
Revenue bonds (project revenues)
General obligation bonds (general tax authority)

Structured – CDO, CMO
What are the two bond features?
1. Credit/quality features
2. Cash flow features
List what is included in the credit quality features (6).
-Mortgage bonds
-Subordinated debenture
-Income bond
-Junk bond
List what is uncluded in the cash flow features (7).
-Zero coupon bond
-Floating rate bond
-Inflation indexed bond
-Putable bond
-Callable bond
-Sinking fund
What are the two main bond contract features and their qualities?
1. Bond Indenture (legal document)
-Trustee represents bondholders
-Restrictive covenants (dividends, debt ratios)

2. Cash flow provisions
-Interest rate: Fixed or floating
-Sinking fund – Early retirement of principal
--Call for redemption by annual lottery
--Buy bonds on the open market
-Options: Call, put, sinking fund
-Convertible into shares of common stock
What are the two main bond rating services?
Moody's and S&P
What is the difference b/w investment grade bonds and junk bonds?
->Investment grade bonds: AAA, AA, A, or BBB

->Junk Bonds: Below BBB (BB, B, CCC, etc.)
What is preferred stock?
Priority over common stock in distribution of dividends and assets
Dividend payments are a fixed % of par value
Can be omitted if not earned – without bankruptcy risk
What are the main features of preferred stock?
-Cumulative dividends (Typical)
-Conversion into common stock (Typical)
-Voting rights (Only when dividends not paid)
-Sinking funds (Typical for new issues)
What is common stock (equity 2)?
-Represents ownership in a corporation
-Residual claim on assets and earnings of firm
-Common stockholders vote for:
--> Board of directors, mergers, changes in charter
What are the main features of common stock?
-No obligation to pay dividends
-No maturity date
-May have preemptive rights to purchase any additional shares sold by the firm
-Classified stock may have unique rights
What are equity instruments in international markets (2)?
1. Euro stock: Stock traded in countries other than the “home” country of the company, not including the United States

2. Yankee stock: Stock issued for foreign companies that is traded in the United States
what are american depository receipts (ADR's) in international markets?
Represent ownership in stocks of foreign countries that are held in trust by a bank located in the country the stock is traded
What is foreign debt?
Sold by a foreign borrower but denominated in the currency of the country in which it is sold
What is eurodebt?
Debt sold in a country other than the one in whose currency the debt is denominated
ex: euronotes and eurobonds
what is a derivative?
value depends on underlying asset
What is an option?
contract that gives buyers the right to buy or sell an asset at a set price w/in a specified period of time.
what is a future?
arrangement for delivery of an item at a set future date at a set price
what is the derivative Swap?
an arrangement to exchange cash flows
-ex: interest rate swaps
Name the embedded options on preferred stocks and bonds.
-Call Option: Issuer option to repurchase
-Put option: Investor option to sell
-Sinking fund option: Investor option to repurchase
-Convertible – Investor option to exchange for common stock
-->Conversion ratio: Number of shares of common stock the holder receives upon conversion
From the issuers perspective, what is the benefit of debt?
-Interest Tax Deductible
-Lowest cost of financing
-No voting rights
-No dilution of ownership
What is the disadvantage of issuing debt?
-Inflexible legal obligation
-Increases leverage
-Covenants may limit flexibility
From the investors perspective, what are the advantages and disadvantages of debt?
-Priority claim on earnings
-Priority claim on assets
-Predictable cash flows
-Low risk

-Low return (limited upside)
-No ownership or control
From the issuers perspective what are the advantages and disadvantages of preferred stock?
-No voting rights
-No dilution of ownership

-Higher cost than debt
-Increases leverage
-Covenants may limit flexibility
From the investor's perspective what are the advantages and disadvantages of preferred stock?
-Senior to common stock
-Predictable cash flows
Relatively low risk
-70% Corporate dividend exclusion

-Low return (limited upside)
-No ownership or control
From the issuer's perspective what are the advantages and disadvantages of commmon stock?
-No dividend obligation
-No maturity or repayment

-High cost
-Dilutes ownership
-Dilutes control
From the investor's perspective what are the advantages and disadvantages of commmon stock?
-Highest expected return
-Ownership and control

-High risk