Finance Midterm Exam- Chapters: 1,2,5,6,7,8,9

annuity

A level stream of cash flows for a fixed period of time

stated interest rate

The interest rate expressed in terms of the interest payment made each period. Also known as the quoted interest rate.

dirty price

The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.

zero coupon bond

a bond that makes no coupon payments and is thus initially priced at a deep discount

current yield

a bond's annual coupon divided by its price

deferred call premium

a call provision prohibiting the company from redeeming a bond prior to a certain date

cash flow to creditors

a firm's interest payments to creditors less net new borrowing

Working capital

a firm's short-term assets and liabilities

proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares

net present value profile

a graphical representation of the relationship between an investment's NPVs and various discount rates

Dividend Growth Model

a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

protective convenant

a part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest

treasury yield curve

a plot of the yields on treasury notes and bonds relative to maturity

straight voting

a procedure in which a shareholder may cast all votes for each member of the board of directors

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

mutually exclusive investment decision

a situation in which taking one investment prevents the taking of another

marginal tax rate

amount of tax payable on the next dollar earned

sinking fund

an account managed by the bond trustee for early bond redemption

broker

an agent who arranges security transactions among investors

dealer

an agent who buys and sells securities from inventory

call provision

an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity

annuity due

an annuity for which the cash flows occur at the beginning of the period

perpetuity (consols)

an annuity in which the cash flows continue forever

average accounting return

an investment's average net income divided by its average book value

debenture

an unsecured debt, usually with a maturity of 10 years or more

note

an unsecured debt, usually with a maturity under 10 years

Free cash flow

another name for cash flow from assets

member

as of 2006, a member is the owner of a trading license on the NYSE

operating cash flows

cash generated from a firm's normal business activities

cash flow to stockholders

dividends paid out by a firm less net new equity raised

common stock

equity without priority for dividends or in bankruptcy

noncash items

expenses charged against revenues that do not directly affect cash flow, such as depreciation

real rates

interest rates or rates of return that have been adjusted for inflation

nominal rates

interest rates or rates of return that have not been adjusted for inflation

dividends

payments of cash from a corporation to its stockholders, made in either cash or stock

over the counter market

securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories

stakeholder

someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

preferred stock

stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

call premium

the amount by which the call price exceeds the par value of a bond

payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

coupon rate

the annual coupon divided by the face value of a bond

interest rate risk premium

the compensation investors demand for bearing interest rate risk

net present value

the difference between an investment's market value and its cost

bid-ask spread

the difference between the bid price and the asked price

Internal rate of return

the discount rate that makes the NPV of an investment zero

capital gains yield

the dividend growth rate, or the rate at which the value of an investment grows

bearer form

the form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond

registered form

the form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record

effective annual rate (EAR)

the interest rate expressed as if it were compounded once per year

discounted payback period

the length of time required for an investment's discounted cash flows to equal its initial cost

primary market

the market in which new securities are originally sold to investors

secondary market

the market in which previously issued securities are traded among investors

Capital Structure

the mixture of debt and equity maintained by a firm

liquidity premium

the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity

default risk premium

the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

taxability premium

the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status

inflation premium

the portion of a nominal interest rate that represents compensation for expected future inflation

Agency problem

the possibility of conflict of interest between the stockholders and management of a firm

profitability index (benefit-cost ratio)

the present value of an investment's future cash flows divided by its initial cost

bid

the price a dealer is willing to pay for a security

asked price

the price a dealer is willing to take for a security

clean price

the price of a bond net of accrued interest; this is the price that is typically quoted

Face Value or Par Value (of a Bond)

the principle amount of a bond that is repaid at the end of the term.

Capital Budgeting

the process of planning and managing a firm's long-term investments

discounted cash flow (DCF) valuation

the process of valuing an investment by discounting its future cash flows

yield to maturity

the rate required in the market on a bond

term structure of interest rates

the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money

Fisher effect

the relationship between nominal returns, real returns, and inflation

maturity

the specified date on which the principal amount of a bond is paid

Coupon

the stated interest payment made on a bond

cash flow from assets

the total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital cash flow to creditors + cash flow to stockholders

indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue

average tax rate

total taxes paid divided by total income