FIN 320F: Exam 1

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FIN 320F
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with bonds, the interest rate is called..
the coupon rate
with t-bills, the interest rate is called...
both the discount rate and the risk-free rate (rsubrf)
the maturity date is...
when the principal must be repaid
equation for bonds
INT = (M x C)/m -INT: interest payment -M: par value of bond -C: annual coupon rate -m: # of payments per year
M will always be..
$1000
in event of liquidation, __ have priority over ___
debt holders; equity holders
order that everyone is paid
-1st: employees/customers -2nd: gov't, debt holders (creditors/lenders/debt investors), and equity holders (owners/equity investors/stock holders)
do debt holders have voting rights
no, but they can exert some influence through bond indentures or loan contracts
federal gov't debt includes...
US treasury bills, notes, and bonds
Default Risk Premium (DRP) on a treasury instrument is..
always 0%
revenue generating bonds are repaid with...
revenue generated by the project that the bond financed
general obligation bonds are repaid with..
property tax dollars
corporate debt includes...
commercial paper, term loans, junk bonds and investment grade bonds
a call provision allows the bond issuer to..
call (pay off) the bond before the maturity date
call provisions generally __ the cost of debt, b/c ___
increase; add to investor's risk
a sinking fund requires..
the bond issuer to pay off the debt over the course of time
a sinking fund provision ___ the cost of debt
decreases
a debenture bond has..
no collateral backing it up
a mortgage bond..
is secured by some form of collateral
cost of mortgage bonds is higher/lower than cost of debenture bonds
lower
3 rating agencies
Moody's, Standard & Poor's, and Fitch
Moody's, Standard & Poor's, and Fitch
-are declaring themselves insolvent. -assets get liquidated, proceeds go to customers, employees, gov't -nothing left for owners
chapter 11 bankruptcy
-company is restructuring its debts -company is negotiating new payment terms with its lenders -if lenders agree to forgive some debts in exchange for ownership of company, former equity holders end up with nothing
chapter 9 bankruptcy
used when municipalities restructure their debts (Detroit)
chapter 13 bankruptcy
used when individuals attempt to restructure their debts
common stock..
-represents ownership -never matures -may/may not pay dividends
advantages of common stock over debt for the issuer:
-doesn't require company to make fixed payments -doesn't mature and never has to be repaid -improves company's debt ratio
disadvantages of common stock over debt for the issuer
-company may have to give up some voting control -if company chooses to pay a dividend to owners, results in drain on company cash -cost to issue common stock is higher than cost to issue debt (greater risk) -common stock dividend payments are not tax deductible
preferred stock is..
-cross b/ween stocks and bonds -pays a dividend -stockholders can't force company into bankruptcy
lowest risk and return:
lowest risk and return:
market order is..
-an instruction to buy/sell a stock as soon as your order reaches the market. -most common
limit order is..
order to buy/sell at a particular price
stop order
order to sell when price drops to a particular prie
buying on the margin..
-borrowing money from your broker to buy stock -leverage: lucrative but risky
stocks are traded in...
equity markets
biggest stock market in US is..
New York Stock Exchange (NYSE)
securities with maturities of more than a year are traded in..
capital markets
securities that mature in a year or less are traded in..
money markets
nearly all stock market transactions are..
secondary market transactions
3 ways money is transferred from those who have money to those who need money
via a direct transfer -through an investment banker -through a financial intermediary
mutual funds are..
investment companies that pool resources of many investors in order to buy stocks/bonds of other companies
majority of mutual funds invest in..
stocks
growth funds invest in..
-firms that are growing faster than their industries in order to earn above average capital gains -more focused on earning capital gains than on earning dividend income.
aggressive growth funds invest in..
IPO's and small firms
IPO's and small firms
firms that they consider to be undervalued
growth-and-income funds invest in..
-steadily growing blue chip companies that pay dividends -attempt to earn long term capital appreciation with higher current income (from dividends) than growth funds earn
income/equity-income funds invest in..
firms that pay high dividends in order to ensure that current income stays ahead of inflation
sector funds invest in..
firms that are all within a particular industry
international funds invest in..
firms outside US
Emerging market funds invest in..
firms that are in rapidly growing developing economies

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