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