Chp 6-10, Finance

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original maturity

# of years to maturity at the time a bond is issued

private placement

A private market sale of debt or equity.

flotation cost

The costs incurred by the firm when it issues securities to raise funds

underwriting

The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).

Real-risk free rate of interest

interest rate that would exist on rissoles security if no inflation were expected

bond

long term contract in which a borrower agrees to make payments of interest

standard deviation

measure of variability ,can be used as a measure of risk

nondiversifiable risk

measured by beta,

liquidity premium

premium added to the equilibrium interest rate on a security, if that security cannot be converted to cash on short notice and at close to its "fair market value"

Maturity Risk Premium

premium that reflects interest rate risk, the higher, the longer the loan is

real risk-free rate

rate for a short term risk less security when inflation is zero

nominal risk-free

rate on a treasury bill/bond

interest rate risk

risk of capital losses to which investors are exposed because of changing interest rate

Reinvestment Rate Risk

risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested

Yield Curve

shows relationship between bond yields and maturities

beta

shows the extent to which a given stock's returns move up and down with the stock market, measures market risk

maturity date

specified date on which the par value of a bond must be repaid

coupon interest rate

stated annual interest rate on a bond

expected value

the "average outcome", not a measure of risk

risk

the chance that some unfavorable event will occur

cost of capital

the costs of debt, preferred stock, and common equity

Par value

the face value of a bond

yield to maturity

the rate of return earned on a bond if it is held to maturity

Nominal Risk-free Rate of Interest

the real risk free rate plus a premium for expected inflation

Valuation

value of any financial asset; present value of cash flows the asset is expected to produce

Wc

weight of common equity in the capital structure

Wp

weight of preferred stock in the capital structure

break point

where you run out of retained earnings, amount of capital raised beyond which new common stock must be issued

Wd

wight of a long-term debt in the capital structure

preferred stock

gets preference in comparison to common stockholders

portfolio

group of assets; 2 or more

fisher effect

higher inflation, causes higher inflation premium

absolute priority

holders of preferred stock have precedence over common shareholders

cumulative feature

if company skips paying a dividend, then the company will have to pay it in the future

participating feature

Allows preferred stockholders to share on a percentage basis in the distribution of an abnormally large dividends

selling group

Group of dealers appointed by the syndicate manager of an UNDERWRITING GROUP, as AGENT for the other underwriters, to market a new or secondary issue to the public.

mortgage bond

a bond backed by fixed assets

income bond

a bond that pays interest only if it is earned

Default Risk Premium

a difference between the interest rate on U.S. treasury bond and a corporate bond of equal maturity and market ability; premium added as compensation for risk that an investor will not get paid in full

proxy

a document giving one person the authority to act for another, typically the power to vote shares of common stock

indenture

a formal agreement between the issuer and the bondholders

underwriting syndicate

a group of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities

probability distribution

a list of all possible outcomes and their associated probabilities

debenture

a long-term bond that is not secured by a mortgage on specific property

Inflation Premium

a premium equal to expected inflation that investors add to the real risk-free rate of return; premium added to the real risk free rate to compensate for a decline in purchase power over time

Call Provision

a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date

Sinking Fund Provision

a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year

best efforts arrangement

agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee that the securities will be sold

security market line

an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities

liquidity risk premium

based on bond's marketability and frequency, the less frequently the security is traded the higher the premium is added, increased interest

common stock

basic unit of ownership in a corporation

Maturity

because interest rate of changes are uncertain, this premium is added for uncertainty

subordinated debenture

bonds having a claim on assets only after the senior debt has been paid in full in the event of liquidation

corporate bonds

bonds issued by corporations

Treasury bonds

bonds issued by federal government

municipal bonds

bonds issued by state and local governments, interest rate is lower that corporate bond of equivalent risk

Convertible Bonds

bonds that are exchangeable at the option of the holder for the issuing firm's common stock

zero coupon bonds

bonds that pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation

diversification

combining assets into a portfolio, helps get rid of some risk, and investing in different types of companies, not just similar companies

classified stock

common stock that is given a special designation such as Class A or Class B to meet the special needs of the company


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