Chp 6-10, Finance
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