Intro To Finance Exam 3

Front 1

debenture

Back 1

any unsecured long term debt. More risky than secured bonds and must provide investors with high yields.

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subordinated debentures

Back 2

some debentures are given subordinated standing in case of insolvency when firms have more than one issue of debentures outstanding. These debentures are honored only after the claim of secured debt and unsubordinated debentures have been satisfied.

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mortgage bonds

Back 3

a bond secured by a lien on real property. Value of real property is greater than that of the mortgage bonds issued.

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Eurobonds

Back 4

securities/bonds issued in a country different from the one in which the currency of the bond is denominated. ex bond issued in europe by an american company.

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zero and very low coupon bonds

Back 5

allow the issuing firm to issue bonds at a substantial discount from their 1,000 face value with a zero or very low coupon rate.

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junk bonds (high yield bonds)

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high risk debt with ratings of BB or below by Moody's and Standard and Poor's. Lower the rating the higher chance of default. Also called high yield bonds because of the high interest rates they pay the investor

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convertible bonds

Back 7

debt securities that can be converted into a firm's stock at a pre-specified price.

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par value

Back 8

a bonds face value, which is returned to the bondholder at maturity.

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coupon interest rate

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indicates the percentage of the par value of the bond that will be paid out annually in the form of interest.

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maturity

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of a bond indicates the length of time until the bond issuer returns the par value to the bondholder and terminates or redeems the bond.

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callable or redeemable bonds

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if a company issues bonds and then later the prevailing interest rate declines, the firm may want to pay off bonds early and then issue new bonds with a lower interest rate.

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indenture

Back 12

the legal agreement between the firm issuing the bonds and the trustee who represents the bondholders

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liquidation value

Back 13

the dollar sum that could be realized if an asset were sold individually and not as part of a going concern

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market value

Back 14

the observed value for the asset in the marketplace

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intrinsic/economic value (fair value)

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the present value of the asset's expected future cash flows.

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valuing of bonds

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1 amount and timing of cash flows to be recieved
2 time to maturity of the bond
3 the investor's required rate of return

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yield to maturity

Back 17

the rate of return the investor will earn if the bond is held to maturity.

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current yield

Back 18

ratio of the annual interest payments to the bond's current market price

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interest rate risk

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risk of changing values as interest rates vary

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discount bond

Back 20

bond sells at a discount rate below par value

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premium bond

Back 21

bond is selling at a premium above par value

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preferred stock

Back 22

a hybrid security, many characteristics of both common stock and bonds

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cumulative feature of preferred stock

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requires all past, unpaid preferred stock dividends be paid before any common stock dividends are declared

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protective provisions

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allow voting rights in the event of nonpayment of dividends or they restrict payment of common dividends if the preferred stock payments are not met or if the firm is in financial difficulty

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convertible preferred stocks

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at the discretion of the holder, the stock can be converted into a predetermined number of shares of common stock.

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call provision

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entitles a company to repurchase its preferred stock from holders at stated prices over a given period of time

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sinking-fund provision

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requires the firm to periodically set aside an amount of money for the retirement of its preferred stock.

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common stock

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a certificate that indicates ownership in a corporation.

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limited liability of common stock

Back 29

liability in the case of bankruptcy is limited to the amount of their investment. aids the firm in raising funds

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proxy fights

Back 30

battles between rivals groups for proxy votes

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majority voting

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each share of stock allows the shareholder one vote, and each position on the board is voted on separately.

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cumulative voting

Back 32

each share of stock allows the stockholder a number of votes equal to the number of directors being elected.

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preemptive rights

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entitles the common shareholder to maintain a proportionate share of ownership in the firm.

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rights

Back 34

certificates issued to the shareholders giving them an option to purchase a stated number of new shares of stock at a specified price during a 2 to 10 week period.

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free cash flow valuation

Back 35

defines the value of a firm as the present value of its expected future cash flows.

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capital budgeting

Back 36

evaluating profitable projects or investments in fixed assets.

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payback period

Back 37

the number of years needed to recover the initial cash outlay related to an investment.

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profitability index

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the ratio of the present value of future free cash flows to the initial outlay.

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internal rate of return

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the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay.

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capital rationing

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when a firm places a limit on the dollar size of the capital budget.

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size disparity problem

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occurs when mutually exclusive projects of unequal projects are examined.

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time disparity problem

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results from the differing reinvestment assumptions made by the net present value and internal rate of return decision criteria.

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unequal lives problem

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whether or not it is appropriate to compare mutually exclusive projects with different life spans. ex. remodel an old hotel or build a new one.