Finance Test 2
high bond ratings have low yields
true
An indenture is an unsecured bond, and most of the bonds sold today in the US are of this type
False
Security Market Line (SML)
1. There is a basic reward for waiting: risk free rate 2. The greater the risk, the greater the expected reward 3. there is a constant trade-off between risk and reward at all levels of risk
EAR equation
EAR=((1+APR/m)^m)-1
the coupon payment for an annual-coupon corporate bond is equal to the coupon rate multiplied by the current price of the bond
F
Name 3 bond rating agencies
Fitch, Moody's, and Standard & Poor's
List in order of merit, the various grades of bonds
Investment grade bonds, speculative grade bonds(junk bonds), extremely speculative bonds
the fisher effect involves which of the items below
Nominal rate, the real rate, and inflation
most consumer loan payments are monthly
T
Zero-coupon bonds
a bond that pays zero coupons; only payment that bond holders would receive would be the par value at the maturity date
Premium Bond
a bond that sells above its par value
Discounted Bond
a bond that sells below it's par value
Beta
a statistical measure o the volatility of an individual security compared with the market as a whole
Risk-Free Rate
a theoretical interest rate at which an investor is guaranteed to earn the subscribed rate and at which the borrower will never default, (rate of return for an investment with zero risk ex. U.S. Treasury Bill
Debentures
always unsecured bonds
Name 3 bonds with option features
callable bond, putable bond, convertible bond
Truth in Savings Law
established uniformity in the disclosure of terms and conditions regarding interest and fees when giving out information on or opening a new savings account
Bonds are sometimes called
fixed income securities
what two primary components make up nominal interest rates
inflation and the real interest rate
Bond
long term debt instrument by which a borrower of funds agrees to pay back the funds (the principle) with interest on specific dates in the future
Preferred Stock
ownership class of stock that has preferential claims; features a dividend that must be paid out before dividends to common stockholders in case of bankruptcy and liquidation, it has priority claim to assets before common stockholders.
Coupon
regular interest payment of the bond (coupon rate*par value=coupon)
The Fisher Effect
relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation
systemic risk
risk that cannot be diversified away
Yield to Maturity
the discount rate of the bond or the return the bondholder receives on the bond if it is held to maturity
Capital Asset Pricing (CAPM)
the equation form of of the SML and is used to explain the behavior of security prices
Coupon rate
the interest rate for the coupons, expressed in annual terms and stated in the bond
Nominal Interest Rates
the percentage change in the actual dollars that you receive on your investment
Effective Annual Rate (EAR)
the rate of interest actually paid or earned per year and depends on the number of compounding periods
Diversification
the spreading of wealth over a variety of investment opportunities so as to eliminate some risk.
Par value
the stated Face Value of the bond. What is on paper
Annual Percentage Rate (APR)
the yearly rate earned by investing or charged for borrowing
ex ante view
when we look at the future outcomes or investment possibilities or before the fact
ex-post view
when we look history (or looking back at events) or after the fact
