Finance Exam 2

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Negative covenant

thou shalt not type of covenant - limits or prohibits actions the company might take

Positive covenant

"thou shalt" - specifies an action the company agrees to take or a condition the company must abide by

Some sinking funds start about ___ after the initial issuance

10 years

Par value is usually

1000

Call protected

A bond that cannot be redeemed do to call provision

Treasury Yield Curve

A plot of the yields on treasury notes and bonds relative to maturity

Highest rating a firms debt can have is

AAA or Aaa - best quality lowest degree of risk

NPV Positive

Accept

Face value

Amount that will be repaid at the end of the loan (par value)

Sinking Fund

An account managed by the bond trustee for the purpose of repaying the bonds. Company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt

Current Yield

Annual Coupon divided by price

Coupon Rate

Annual coupon divided by the face value

Zero Coupon Bonds

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

Municipal Notes

Borrowing money by buying and selling notes

Dirty Price

Full or invoice price

Coco bonds

Have a coupon payment

NoNo bonds

Have zero coupons

Seniority

Indicates preference in position over other lenders and debts

Describe the 2 sources of return from investing in a bond

Interest on interest, change in bond price

Real rates

Interest rates or rates of return that have been adjusted for inflation

Sukuk

Islamic bonds

Nominal Rates

Not adjusted for inflation

Maturity

Number of years until the face value is paid

Bid

Price a dealer is willing to pay

Asked price

Price dealer is willing to take

Deferred call provision

Prohibits company from redeeming a bond before a certain date

Clean price

Quoted Price

NPV Negative

Reject

Coupons

Stated interest payment made on a bond

Coupon

Take the rate * FV

Interest rate risk

The compensation investors demand for bearing interest rate risk

Yield to Maturity

The interest rate required in the market on a bond (the bonds yield)

Liquidity premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity

Default risk premium

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

Taxability Premium

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax states

Inflation Premium

The portion of a nominal interest rate that represents compensation for expected future inflation

Term Structure of Interests Rates

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is the pure time value of money

The Fisher Effect

The relationship between nominal returns, real returns and inflation

Always accept NPV project

True

Bond

When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities

Call Provision

allows the company to repurchase or "call" part or all of the bond issue at state prices over a specific period - Corporate bond callable

Put bond

allows the holder to force the issuer to buy back the bond at a stated price

Structured notes

bonds based on stocks, bonds, commodities, or currencies

To determine make whole call price

calculate present value of the remaining interest and principal payments at a rate specified in the indenture

Convertible bond

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

Death Bond

companies purchase life insurance policies from individuals who are expected to die within 10 years

Floating rate bonds

coupon payments are adjustable

Catasphrophe bons

covers hurricanes and earthquakes

Call premium

difference between the call price and the stated value when the call price is above the bond's stated value

Transparent

financial market where you can easily observe its prices and trading volume (New York Stock Exchange)

To determine the value of a bond at a particular point you need to know

number of periods until maturity, the face value, the coupon and the market interest rate for bonds with similar features

Protective covenant

part of the indenture or loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan - 2 types

Reverse convertible

redemption at maturity can be paid in cash at par value or paid in shares of stock

Inome bonds

similar to conventional bonds, except that coupon payments depend on company income

Interest rates change in the market place, cash flows

stay the same


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