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49 Cards in this Set
- Front
- Back
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1-1: rational investors prefer (2)
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1. higher returns
2. lower risk |
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1-2: A cash flow received sooner is worth ____ than a cash flow received later
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more
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1-4: 3 interrelated areas of finance
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1. financial markerts and institutions
2. investments 3. managerial (corporate) finance |
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1-5: Name the 4 main financial institutions and explain them.
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1.COMMERCIAL BANK
-depository: business loans, trust operat., brokerage, insurance 2. SAVINGS AND LOANS (THRIFTS) -depository: real estate loans 3. CREDIT UNIONS depository: consumer loans 4. INSURANCE COMPANIES |
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1-6: name the 4 types of investment companies
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1. stock brokerage
2.banks 3. investment companies 4. insurance companies |
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1-7 explain the 4 types of managerial finance
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1. MANAGEMENT
-strategic planning, acquisitions, employee incentives 2. MARKETING -product introductions, advertising, capital budgeting 3. ACCOUNTING -provides data for financial decisions 4. INFORMATION SYSTEMS - provides data for financial decisions |
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1-8 Descibe the history of financial markets beginning from 1900's.
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-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) |
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1-8 What is the Glass-Steagall Act of 1933?
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- separated commercial and investment banking
- authorized deposit insurance |
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what is the SARBANES-OXLEY ACT of 2002?
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-est. accountability & responsibility for financial information
-outside directors & independent auditors -CEO & CFO certify finan. statements. |
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1-13 Globalization of business allows for...
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-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 |
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1-15: what is the job of a financial manager? (2)
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1. max value of the firm
2. value= present, or current, value of cash flows an asset is expected to generate in the future |
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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 |
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What are the major types of financial instruments? (3)
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1. money market instuments
2. capital market instruments 3. derivatives market instruments |
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what are money market instruments?
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t-bill, CD's, eurodollar deposit, money market mutual fund
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what are capital market instruments?
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Equity (Stock)
-Common Stock -Preferred Stock Debt (Bonds) -Maturity -Sector/Issuer -Structure |
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What are derivatives market instruments?
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- options
- futures - swaps |
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why do firms issue financial instruments?
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...so it can purchase the tangible assets necessary to produce income;
-Common Stock -Preferred Stock -Debt -Hybrid (convertible) |
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What is included in the equity part of the balance sheet?
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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 |
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What is debt?
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a loan given to an individual, company, or government
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Explain the features of debt.
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-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 |
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Short Term Debt. What does it include? order of risk: high to low
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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) |
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What is long term debt?
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Term Loans
Private contract between borrower and lender Advantages: Speed, flexibility, and low issuance cost Bonds Long-term contract Borrower agrees to pay bondholders: Scheduled principal and interest payments |
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List the bond sectors and explain them (8).
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Treasury
Agency Corporate Foreign Yankee - Foreign debt issued in US Municipal bonds – State/local governments Revenue bonds (project revenues) General obligation bonds (general tax authority) ___________________________ Asset-Backed Mortgage-Backed Structured – CDO, CMO |
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What are the two bond features?
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1. Credit/quality features
2. Cash flow features |
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List what is included in the credit quality features (6).
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-Structured
-Mortgage bonds -Debenture -Subordinated debenture -Income bond -Junk bond |
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List what is uncluded in the cash flow features (7).
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-Structured
-Zero coupon bond -Floating rate bond -Inflation indexed bond -Putable bond -Callable bond -Sinking fund |
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What are the two main bond contract features and their qualities?
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1. Bond Indenture (legal document)
-Trustee represents bondholders -Restrictive covenants (dividends, debt ratios) 2. Cash flow provisions -Interest rate: Fixed or floating -Maturity -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 |
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What are the two main bond rating services?
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Moody's and S&P
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What is the difference b/w investment grade bonds and junk bonds?
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->Investment grade bonds: AAA, AA, A, or BBB
->Junk Bonds: Below BBB (BB, B, CCC, etc.) |
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What is preferred stock?
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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 |
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What are the main features of preferred stock?
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-Cumulative dividends (Typical)
-Conversion into common stock (Typical) -Voting rights (Only when dividends not paid) -Sinking funds (Typical for new issues) |
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What is common stock (equity 2)?
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-Represents ownership in a corporation
-Residual claim on assets and earnings of firm -Common stockholders vote for: --> Board of directors, mergers, changes in charter |
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What are the main features of common stock?
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-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 |
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What are equity instruments in international markets (2)?
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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 |
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what are american depository receipts (ADR's) in international markets?
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Represent ownership in stocks of foreign countries that are held in trust by a bank located in the country the stock is traded
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What is foreign debt?
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Sold by a foreign borrower but denominated in the currency of the country in which it is sold
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What is eurodebt?
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Debt sold in a country other than the one in whose currency the debt is denominated
ex: euronotes and eurobonds |
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what is a derivative?
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value depends on underlying asset
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What is an option?
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contract that gives buyers the right to buy or sell an asset at a set price w/in a specified period of time.
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what is a future?
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arrangement for delivery of an item at a set future date at a set price
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what is the derivative Swap?
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an arrangement to exchange cash flows
-ex: interest rate swaps |
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Name the embedded options on preferred stocks and bonds.
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-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 |
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From the issuers perspective, what is the benefit of debt?
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-Interest Tax Deductible
-Lowest cost of financing -No voting rights -No dilution of ownership |
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What is the disadvantage of issuing debt?
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-Inflexible legal obligation
-Increases leverage -Covenants may limit flexibility |
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From the investors perspective, what are the advantages and disadvantages of debt?
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ADVANTAGES
-Priority claim on earnings -Priority claim on assets -Predictable cash flows -Low risk DISADVANTAGES -Low return (limited upside) -No ownership or control |
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From the issuers perspective what are the advantages and disadvantages of preferred stock?
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Advantages
-No voting rights -No dilution of ownership Disadvantages -Higher cost than debt -Increases leverage -Covenants may limit flexibility |
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From the investor's perspective what are the advantages and disadvantages of preferred stock?
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Advantages
-Senior to common stock -Predictable cash flows Relatively low risk -70% Corporate dividend exclusion Disadvantages -Low return (limited upside) -No ownership or control |
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From the issuer's perspective what are the advantages and disadvantages of commmon stock?
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Advantages
-No dividend obligation -No maturity or repayment Disadvantages -High cost -Dilutes ownership -Dilutes control |
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From the investor's perspective what are the advantages and disadvantages of commmon stock?
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Advantages
-Highest expected return -Ownership and control Disadvantages -High risk |
