FNAN307 Exam 2 (Luquette) Connect

Retention Rate

(NI - Div) / NI

Investment Grade Bonds are graded

BBB and above

If actual sales growth exceeds sustainable growth then ____; if actual sales growth is lower than sustainable growth than ____.

Cash Deficit; Cash Surplus

The largest US city to ever suspend payment son its unsecured debt and declare bankruptcy was:

Detroit

Annual Return

Div Yield + % Change in Share Price

Two types of municipal bonds exist: ____ and ____ bonds.

General Obligation (GO); Revenue

Return on Equity (ROE)

NI / Beg Equity

Premium

Payment today for the right to sell later; price paid for the option

If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is:

Ra = Rb (1-t)

Market Efficiency

Strong-Form Weak-Form Semistrong-Form

A sinking fund provision is ____ to investors, so bonds with a sinking fund provision generally have ____ yields than bonds without.

attractive; lower

Derivatives

claim to future payment dependent on the value of some other asset; contingent on the value of the underlying security (ex: option to purchase stock)

In the US, the quoted price for a T-Note or bond is the ____ which ___ include the accrued interest.

clean price; does not

Individual rules and restrictions within the bond indenture are referred to as:

covenants

Treasury notes and bonds are backed by the full faith and credit of the US Govt and are considered to be free from

default risk

If the market value of the securities the bond holder receives with conversion ____ the market value of the bond, the bond holder will ____.

exceeds; convert/take profit doesn't exceed; not convert

Sustainable Growth Rate formulas

g = change in equity / beginning equity g = (Retention Rate x Earnings) / Beg. Equity g = Retention Rate x Beg. ROE g = profit margin x Retention Rate x asset turnover x asset-to-equity ratio

Company Life Cycle

growing -> sustaining -> maturing - startup (loosing money while establishing in the market) - rapid growth (profitable but growing so rapidly that it needs external funding regularly) maturity (decline in growth, switching from external financing to generating more can than can be reinvested) - decline (marginally profitable, generates more cash than it can reinvest internally, suffers declining sales)

Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ____ interest rates paid on publicly placed issues.

higher than

worthless Put Options

if, at maturity, the strike price is lower Than the current stock price; the right to sell a stock for less than its current market price has NO VALUE

The semiannual coupon paid on TIPS securities is based on the ____ and so ____ from period to period.

inflation-adjusted; may vary

If the issuing firm is in violation of the bond indentures, the bond trustee _____ and ____.

informs the bondholders; initiates legal action

Currently, only ____ and ____ as defined by the SEC can participate in private placement of bonds.

institutional investors; large investors

Bonds backed by insurance will have the credit rating of the ____ and a substantially ____ interest rate than if uninsured.

insurer; lower

Certain institutional investors are prohibited by state and federal law from investing in bonds that are below ____, called ____ due to their risk.

investment grade; junk bonds

Bonds are ____ debt obligations traded in ____ markets

long-term; capital

Sustainable Growth Rate

max rate at which company sales can increase without depleting financial resources.

Bond Variables

par value, coupon rate, maturity date

Prices of T-Notes and bonds are quoted as ____ of the ____ of the security.

percentage; face value

The initial primary market sale for municipal bonds occurs through which of the following methods:

public offering w/investment bank as underwriter private placement to small group of investors

Private placement of bonds are unregistered but there are restrictions on the ____ of the bonds.

resale

Stock warrants are attached to bonds by ____ issuers to make the bond more attractive to investors and ____ the interest rate that must be paid.

risky; reduce

A STRIP is a Treasury security in which ____ and ____ can be separated and sold as individual securities.

semiannual coupon payments; repayment of principal

Fixed Claim Residual Claim

set timing and payout (ex: bond) remaining cash after all prior fixed claims are paid

Below-Grade Bonds

speculative, high-yield, or junk bonds

Calls are worthless at maturity if the ____ exchange rate is ____ than the option's strike price.

spot; less

The coupon rate for a Treasury note or bond is determined by rounding the ____ down to the nearest ____ percent.

stop-out yield; 0.125

The bonds which are considered to be the riskiest and pay the highest yields are:

subordinate debentures

The source of funds for repayment of municipal bonds is ____ or ____.

tax receipts; project revenues

Most corporate bonds are ____ bonds, meaning that the entire issue matures on a single date.

term

Call provisions are ____ to bond holders so callable bonds generally have ____ yields than non-callable bonds.

unattractive; higher

With firm commitment underwriting, the ____ assumes the risk that the entire bond issue might not be sold.

underwriter

The interest rate spread is the difference between the yield on ____ and the yield on ______.

a bond; a Treasury security of similar maturity

Prices of Treasury STRIP securities are quoted as ____ of the ____ of the security.

a percentage; face value

T/F Treasury notes and bonds and municipal bonds trade in very active secondary markets.

True

T/F: A secondary market for municipal bonds exists, though it is generally less active than the secondary market for T-Bonds.

True