Finance

primary market

new market. shares of stock are first brought to the market and sold to investors.

maturity

number of years until the face value is paid

Put Bond / Tender Option Bond

- Allows the holder of the bond to "put" or redeem the bond back to the issuer at par on stated dates - Usually done if prices declined or yields rose

cat bonds

1. Catastrophe bonds. 2. Transfers specific risk from issuers, typically insurance or reinsurance companies, to investors

shareholder rights

1. the right to share proportionally in dividends paid 2. the right to share proportionally in assets remaining after liabilities have been paid in liquidation 3. the right to vote on stockholder matters of great importance preemptive: stockholders will have an opportunity to buy stock before it is offered to the general public

cumulative voting

all directors are elected at the same time. number of shares * number of directors to be elected. allows for minority participation

sinking fund

an account managed by the bond trustee for the purpose of paying bonds

Structured Notes

bonds based on stocks, bonds, commodities, or currencies

broker

brings buyers and sellers together

convertible bonds

can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option

floating rate bonds

coupon rates are adjustable.

straight voting

directors are elected one at a time. does not allow for minority opinion. The person with the most votes will select the candidates.

Inflation and Present Values

discount nominal cash flows at nominal rate or discount real cash flows at real rate. both will get same answer

secondary market

existing shares are traded among investors

proxy voting

grant of authority by a shareholder to someone else to vote his or her shares

Reverse Convertible Bonds

high coupon rates, income portion of the bond return will be high, the potential loss in par value could easily erode the extra return

cumulative or noncumulative

if a dividend is not paid in a particular year, they will be carried forward as an arrearage

stated value

liquidating value is usually $100. "$5 preferred" translates into a dividend yield of 5 percent of stated value

dealer

maintains an inventory and stands ready to buy and sell at any time

staggering votes

only a fraction of dictatorships are up for election. 1. staggering makes it more difficult for a minority to elect a director 2. makes takeover attempts less likely to be successful because it is more difficult to vote in a majority of new directors

zero coupon bonds

pays no coupons at all. must be offered at a price that is lower than its stated value

death bond

purchased from individuals expecting to die in the next 10 years. so that when they do they get paid back. greater life expectancy decreases return to bondholder

real rates

rates that have been adjusted for inflation

nominal rates

rates that haven't been adjusted for inflation

coupon

regular interest payments that a person promises to make

dividends

represent a return on the capital directly or indirectly contributed to the corporation or shareholders - dividends are not liabilities - it is not a business expense - dividends are taxable

shareholder rights

shareholders control the corporation through the right to elect directors. Directors hire managers to carry out their directives.

municipal / state bonds

state and local governments are borrowing money. exempt from federal income taxes varying degrees of risk

common stock

stock that has no special preference either in receiving dividends or in bankruptcy

term structure of interest rates

tells us what nominal interest rates are on default free, pure discount bonds of all maturities

face value or par value

the amount that will be repaid at the end of the loan

coupon rate

the annual coupon divided by the face value

preferred stock

the holders of preferred shares must receive a dividend before holders of common shares are entitled to anything

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

yield to maturity

the rate required in the market on a bond

interest rate risk

the risk that arises for bond owners from fluctuating interest rates 1. the longer time to maturity the greater the interest rate risk 2. the lower the coupon rate the greater the interest rate risk

level coupon bond

when a bond is constant and paid every year

treasury notes or government bonds

when government wishes to borrow money. have no default risk. exempt from state income taxes

inverse relationship between interest and present value of bond

when the interest rate rises the present value of a bond declines and vice versa