Principles of Financial Management Chapter 2

Nominal Interest Rate =

Risk-Free Rate + Risk Premiums

The textbook calls those that don't have enough funds are called _________ __________units.

deficit economic

What is the annual interest payment on a bond with a 7% coupon rate and a $1,000.00 par value?

$70.00

________ _______ ____ __________= the base rate with no premiums (what the rate would be in a perfect world with no inflation or risk).

Real rate of interest

The expected inflation is 4% and the nominal risk-free rate is 6%; the real rate of interest is:

2%

The three most important financial instruments (securities) in Corporate Finance are:

Corporate Bonds, Common Stock, and Preferred Stock.

With respect to bonds, all of the following are true except:

Face value and par value often differ due to changes in economic conditions.

What are the three types of intermediaries?

Investment bankers, brokers, and dealers.

What were the four main tactics the fed deployed to help the country rebound from the 2008 financial crisis?

Low interest rates, bailouts (targeted assistance programs), quantitative easing (injecting money into the banking system through the purchase of securities other than US Treasury Securities), and forward guidance about how long interest rates are likely to stay low

_______________ ______-_________ _________ ______ ___________= real rate + inflation premiums (does not include premiums associated with risk)

Nominal Risk-free rate of interest

___________ _________ _________ ______________= stated or market rate and includes real rate + inflation premiums + risk premiums (another way of stating this is: risk-free rate + inflation premiums)

Nominal rate of interest

When a security is first created, it is sold in the ___________ ___________.

Primary market

True or False People and businesses taking their money out of the bank (because of negative interest rates), causing mass withdrawal is one of the big factors in what keeps interest rates falling below zero.

True

Can interest rates go negative?

Yes they can, but rarely do so.

In the secondary market bond interest rates

are negative if the amount of interest and principal promised to be paid by the issuer to the investor is less than the amount paid for the bond by the investor.

Which of the following are traded in money markets?

banker's acceptances

While long-term securities (like stocks and bonds) are sold in the _________ __________.

capital market

The purpose of the financial system is to...

channel funds from those that have excess funds, to those that need funds.

___________ ____________: -Represents ownership of the firm -Entitles stockholders to the earnings of the firm after all other obligations, e.g., coupon interest to bondholders, have been satisfied -Payments are categorized as dividends and/or capital gains -Carries more risk and offers a higher expected return than bonds

common stock

_________________ _________: -Represent debt of the corporation -Promise payment of interest and, at maturity, repayment of principal -Carry varying degrees of risk and expected rates of return

corporate bonds

The Treasury bill auction:

issues T-bills in minimum denominations of $1,000

A zero-coupon bond:

makes no periodic interest payments

The term __________ ____________ refers to the ease, speed, and cost of trading securities.

market efficiency

The main difference in a bond and a loan is that a bond is financed by an investor, and is traded in the financial _________, where loans are attained from financial _______________.

markets; institutions

Short-term securities are those that mature in less than a year, like treasury bills and commercial paper which are traded in the ____________ __________.

money market

Positive coupon rate bonds:

pay annual interest in the amount of the coupon rate times the face value

_______________ _________: -Stands ahead of common stock in the payment of dividends -Dividends are equal to a fixed percent of par value -Less risk and less expected return than common stock -Usually does not confer voting rights on shareholders

preferred stock

The profits from sales in the ____________ ____________ go to the investors buying and selling the securities.

secondary market

Financial intermediaries are...

specialists in matching buyers and sellers of securities.

The textbook calls those with more funds than they need, __________ _____________units.

surplus economic aka investors

The real rate of interest is 3%:

the expected inflation rate is 3% and the nominal risk-free rate is 6%

Maturity date is:

when the principal is paid

The ________ __________ is a plot of interest rates and time to maturity of bonds with similar characteristics.

yield curve

Typically the ________ __________ is upward-sloping, reflecting a greater maturity risk premium associated with long-term bonds

yield curve