Fin 3320 Exam 1

Explain the concept of Yield to Maturity (YTM)

Yield to maturity is essentially the expected rate of return you will receive as an investor if you hold to bond until maturity

What is the goal of financial management?

maximize the wealth of the shareholders

What are the three main roles financial institutions play?

1. People save and invest their money 2. That money flows to companies through stocks and bonds 3. The money flows back to people

What is the difference between a primary market and a secondary market?

A primary market is when a corporation issues NEW shares of stock and sells them to investors. A secondary market is where shares of a corporation are traded between investors without the involvement of a corporation

What happens to the price of a bond as it gets closer to it's maturity?

As a bond approaches it's maturity the price of the bond gets closer to the face value of the bond

How do the shareholders of most corporations exercise their control of that corporation?

By electing a board of directors

True or False? Dollar amounts received at different points in time can be compared in absolute terms.

False

How do interest rates effect long term versus short term bonds?

Long term bonds are more sensitive to changes in interest rates than short term bonds

What are the three basic questions Financial Managers must answer?

Make Financing Decisions Make Investing Decisions Manage Cash Flows

What are the tax implications for a Partnership?

Pay personal taxes only

What are the tax implications for an S corporation

S corporations are exempt from double taxation. However they are required to pay taxes on their share of the company's income even if no money is distributed to them

True or False?

Smaller investors get better representation on the board under straight voting rather than cumulative voting

What are the major forms of business organization?

Sole Proprietorships Partnerships LLC's Corporation

What is the face value of a bond?

The amount for which the bond is originally issued for

You have purchased a 10% coupon bond for $1040. What will happen to the bond's price if market interest rates rise?

The bond's price will go down. Mathematically, the discount rate will increase, so the PV must decrease.

What are the tax implications for a C corporation?

The corporation pays taxes and the owners must also pay taxes on the distributions they recieve

What is the coupon rate on a bond?

The coupon rate is the interest rate which the bond is issued at

What is the most important type of decision that the financial manager makes?

The investment decision is the most important decision that a financial manager makes, as the manager must decide how to put the owners' money to its best use.

What is the relationship between bond price and interest rates?

The two are inversely related. As Interest rates rise, bond prices go down and vice versa

If a bond has a coupon rate of 10% and a YTM of 7.5% what kind of bond is this?

This bond is a premium bond because the coupon rate is greater than the yield to maturity of the bond

What is a Bond?

a bond is a securitized asset which is essentially a loan.

What does it mean when a bond is trading at a discount?

a bond trades at a discount when the market price of the bond trades below the face value of the bond

What does it mean when a bond is trading at a premium?

a bond trades at a premium when the market price of a bond is greater than the face value of a bond

How does the discount rate affect future value?

as the discount rate increases, so does the future value.

How can we minimize these conflicts of interest?

by minimizing the number of decisions managers make that require putting their self-interest against the interests of the shareholders

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

What is the formula for a perpetuity?

r is equal to rate g is equal to growth rate

What are agency problems, and why do they exist within a corporation?

when managers, despite being hired as the agents of shareholders, put their self-interest ahead of the interests of those shareholders