Principles of Corporate Finance Exam 2 Chpt. 5-7
Annual Percentage Rate (APR)
-The annual rate quoted by law -APR= periodic rate X number of periods per year -Periodic Rate= APR / Periods per year
Effective Annual Rate (EAR)
-The interest rate expressed as if it were compounded once per year -Used to compare two alternative investments with different compounding periods
Amortization Schedule
A chart showing the interest, principal repayment, and loan balance for each period over the life of the loan
Call Provision
A clause in a bond's indenture granting the issuer the right to call, or buy back, all or part of an issue prior to the maturity date
Note
A financial security that generally has a longer term than a bill but a shorter term than a bond
Bond
A promise by the issuer to repay a fixed amount of money on a specific date and to pay a stated amount of interest at fixed intervals
Term Structure of Interest Rates
Also known as yield curve- the relationship the between interest rates or bond yields and different terms or maturities
Yield Curve
Also knows as the term structure of interest rates (shown on a graph)
Coupon/ Coupon Payment
Stated interest payment of a bond
Preferred Stock
Stock that entities the holder to a fixed dividend
Intrinsic Value
The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business
Indenture
The formal contract between the bond issuer and the bondholders
Required Rate of Return
The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project
Growth Rate
The percentage change of a specific variable within a specific time period
Fallen Angels
a bond that was given an investment-grade rating but has since been reduced to junk bond status
Sinking Fund
a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset
Protective Covenant
a part of an indenture or loan agreement that limits certain actions a company may take during the term of the loan to protect the lender's interests
Interest Rate Risk Premium
a premium that reflects interest rate risk (the risk of value change from interest rate changes). Other things being equal, longer term bonds have greater interest rate risk than do shorter term bonds
Annuity
a series of payments of a fixed amount for a specified number of periods. Each payment is equal and occurs at regular intervals
Make-Whole Call
a type of call provision in a bond allowing the borrower to pay off remaining debt early
Debenture
a type of debt instrument that is not secured by physical assets or collateral. Backed only by the general creditworthiness and reputation of the issuer
Deferred Annuity
an annuity that commences only after a lapse of some specified time after the final purchase premium has been paid
Perpetuity
an annuity that goes on forever (an infinite, or perpetual, annuity)
Amortized Loan
if a loan (principal and interest) is paid in equal periodic amounts
Premium Bond
if the yield to maturity is less than the coupon rate
Cash Dividend
money paid to stockholders, normally out of the corporations current earnings or accumulated profits
Annuity Due
payment is at the beginning of the period
Ordinary Annuity
payment is at the end of the period
Common Stock
represents the ownership claim in a corporation. The stockholders are the owners of the firm
Current Yield
return earned from coupon interest relative to the current price of the bond, or the annual coupon interest payment on a bond divided by its current market value
Coupon Rate
the annual coupon payments paid by the issuer relative to the bonds face or par value
Market Price
the economic price for which a good or service is offered in the marketplace
Interest Rate Risk
the risk of changes in bond value (or prices) due to changes in interest rates
Maturity Date
the specified date on which the principal amount of a bond is paid
Zero Coupon Bond
Bonds you make no periodic interest payments
Floating Rate Bond
Coupon rate floats depending on some index value Ex- adjustable rate mortgages and inflation-linked treasuries
Constant Growth Model or (Gordon Model)
D1/(K-g). A method for calculating the intrinsic value of a stock, exclusive of current market conditions
Face Value/Par Value
Face Value, Principal Amount, Maturity Value
Discount Bond
If the yield to maturity is greater than the coupon rate
Yield to Maturity
Market Rate of Return, Bond's Required Return; it is the rate of return that equates (the future coupon payments and the principal repayment to the current market price of the bond)
Principal Amount/Maturity Value
Par Value, Face Value