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