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FIN 320F: Exam 1

with bonds, the interest rate is called..
the coupon rate
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with t-bills, the interest rate is called...
both the discount rate and the risk-free rate (rsubrf)
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the maturity date is...
when the principal must be repaid
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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
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M will always be..
$1000
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in event of liquidation, __ have priority over ___
debt holders; equity holders
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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)
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do debt holders have voting rights
no, but they can exert some influence through bond indentures or loan contracts
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federal gov't debt includes...
US treasury bills, notes, and bonds
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Default Risk Premium (DRP) on a treasury instrument is..
always 0%
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revenue generating bonds are repaid with...
revenue generated by the project that the bond financed
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general obligation bonds are repaid with..
property tax dollars
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corporate debt includes...
commercial paper, term loans, junk bonds and investment grade bonds
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a call provision allows the bond issuer to..
call (pay off) the bond before the maturity date
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call provisions generally __ the cost of debt, b/c ___
increase; add to investor's risk
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a sinking fund requires..
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
decreases
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a debenture bond has..
no collateral backing it up
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a mortgage bond..
is secured by some form of collateral
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cost of mortgage bonds is higher/lower than cost of debenture bonds
lower
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3 rating agencies
Moody's, Standard & Poor's, and Fitch
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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
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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
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chapter 9 bankruptcy
used when municipalities restructure their debts (Detroit)
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chapter 13 bankruptcy
used when individuals attempt to restructure their debts
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common stock..
-represents ownership -never matures -may/may not pay dividends
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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
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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
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preferred stock is..
-cross b/ween stocks and bonds -pays a dividend -stockholders can't force company into bankruptcy
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lowest risk and return:
lowest risk and return:
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market order is..
-an instruction to buy/sell a stock as soon as your order reaches the market. -most common
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limit order is..
order to buy/sell at a particular price
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stop order
order to sell when price drops to a particular prie
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buying on the margin..
-borrowing money from your broker to buy stock -leverage: lucrative but risky
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stocks are traded in...
equity markets
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biggest stock market in US is..
New York Stock Exchange (NYSE)
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securities with maturities of more than a year are traded in..
capital markets
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securities that mature in a year or less are traded in..
money markets
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nearly all stock market transactions are..
secondary market transactions
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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
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mutual funds are..
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..
stocks
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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.
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aggressive growth funds invest in..
IPO's and small firms
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IPO's and small firms
firms that they consider to be undervalued
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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
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income/equity-income funds invest in..
firms that pay high dividends in order to ensure that current income stays ahead of inflation
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sector funds invest in..
firms that are all within a particular industry
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international funds invest in..
firms outside US
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Emerging market funds invest in..
firms that are in rapidly growing developing economies
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