Test 2

Repurchase agreement

An agreement that one firm sells another firm some of its financial assets, and promises to repurchase them at a later date

Certificate of Deposit (CD)

An interest earning time deposit at a bank or other financial intermediary

Classified Stock

Common stock that is given a special designation such as Class A and Class B, and so on and so fourth, to meet special needs of the company

Features of a preferred stock

Control of the Firm: Most preferred stock is nonvoting, but preferred stock holders are often given the right to vote for directors if the company does not pay the preferred dividend Convertibility: Most preferred stock issued is convertible in to common stock. Call Provision: the right to call in the preferred stock for a redemption Sinking fund: Call for the repurchase of and retirement of a given percentage of preferred stock each year. (basically a maturity option) Participating: Preferred stock participates with common stock in sharing the firms earnings

Bond Yield

Current yield + Capital gains yield

Government bonds

Debt issued by a federal, state, or local government

Foreign debt

Debt sold by a foreign narrower but denominated in the currency where it is sold (An example of this form of debt is issued by a German borrower, sold in the United States, and denominated in U.S. dollars.)

Coupon rate

Interest rate paid on a bon or other debt instrument. Stated as a percentage of it's face value (PMT)

Another name for par value when dealing with a preferred stock

Liquidation preference (or value)

Corporate

Long term debt indenture issued by corporations

Current Yield

The portion of a bondholder's return that results from a bond's interest payment, calculated by dividing the bond's interest payment by its market value.

Relevant risk

The portion of a security's risk that cannot be diversified away. The securities market risk. It reflects the security's contribution to the risk of a portfolio

Risk Premium

The portion of an asset's total expected return required by investors as compensation for assuming the additional risks associated with the security, the issuer, and the marketplace.

Market price value

The price at which a stock currently is traded at in the market

Intrinsic (theoretical) value

The value of an asset that, in the mind of a particular investor, it justified by the facts

Short-term debt securities have

A maturity of one year or less.

beta coefficient

A measure of the extend to which the returns on a given stock move with the stock market

Stand alone risk

A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio.

Standard Deviation

A measure of tightness of variability, or a set of outcome

Cumulative devidas

A protective feature of preferred stock that requires preferred dividends that were not paid in previous years to be disbursed before any common stock dividends can be paid

Call provision

A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date

Preemptive right

A provision that gives existing common stockholders the right to purchase new issues of common stock on a prorate basis before any shares can be offered to the investors

Sinking fund

A required annual payment designed to amortize a bond issue.

Coefficient of variation

A standardized measure of risk per unit of return. It is calculated by dividing the STANDARD DEVIATION by EXPECTED RETURN

Preferred Stock

A stock somewhere in-between a common stock and a bond

Revenue bond

A type of bond generally issued by state and local governmental entities and whose interest and maturity payments are raised and paid using income generated by the project being financed.

Callable bonds

A type of bond that allows the bond issuer to retain the privilege of redeeming it at a pre-specified price at some time prior to its normal maturity date.

Probability distribution

A listing of all possible outcomes or events with a probability (Change of occurrence) assigned to each outcome

Potable bond

A bond that can be redeemed at the bondholder's option when certain circumstances exist (for example, debt is increasing substantially)

Zero coupon bond

A bond that pays no annual interest but sells at a discount below par. (NO DIVIDEND, JUST CAPITAL GAINS (APPRECIATION))

Eurodollar Deposit

A deposit in a foreign bank that is denominated in U.S. Dollars (Debt sold in a country other than the one in whose currency the debt is denominated)

Indenture

A formal agreement (contract) between the issuer and the bondholders

Junk bond

A high risk, high yield bond; used to finance mergers, leverage buyouts, and trouble companies

Commercial paper

A legal IOU

Municipal bonds

Bonds issued by a state or local government

Euro Stock and Yankee Stock

Euro Stock: Stock traded in countries other than it's home country, not including the U.S. Yankee Stock: Stock used by foreign companies and traded in the U.S.

Do corporate debt holders (Bond holders) have voting rights?

No, but they can effect management and operations by placing restrictions on where the funds can be used

Federal Funds

Overnight loans from one bank to another bank

Conversion feature

Permits bondholdes to exchange their investments for a fixed number of shares of common stock

Money Market Mutual Funds

Pools of funds management by investment companies primarily invested in short term financial assets.

Market risk premium

The addition return over the risk-free rate needed to compensate investors for assuming an average amount of risk

Risk Aversion

Risk-averse investors require higher rates of return to invest in higher-risk securities

Founders shares

Stock, owned by the firm's founders that has sole boring rights, but generally pays out only restricted dividends (if any) for a specified number of years.

Income stocks

Stocks of firms that traditionally pay large, relatively constant dividends each year

Growth stocks

Stocks that generally pay little or no dividends so they can retain as much of their earnings as possible in order to expand.

TOTAL RISK =

Systematic risk + Unsystematic risk

Market risk

That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk.

Risk

That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk.

Yield to call

The average return earned by a bondholder, given the assumptions that the bond is called on its first call date and that the bondholder receives the eligible interest payments and the call price between the date of purchase and the call date.

Risk

The chance that an outcome other than the expected will occur

Equilibrium

The condition of price stability that results from the equality of a security's expected and required returns.

Coupon

The interest payment paid on a bond, calculated by multiplying the bond's interest rate by its face (par) value. (Coupon=Face Value×Coupon Rate)

SML Line

The line that shows the relationship between risk as measured by bets and the required rate of return for individual securities

CAPM (Capital Asset Pricing Model)

The model used to determine the required return on an asset, which is based on the proposition that an asset's return should be qual to the rRF+ a risk premium that reflects the asset's nondiversiable risk

Yield to maturity

The name given to the return earned by an investor who purchases a bond for its market price, holds it until it matures, and receives all interest and the maturity payment in accordance with the terms contained in the indenture.

Market Risk (nondiversifiable risk)

The part of a security's risk associated with economic, or market, factors that systematically affect all firms to some extent. It cannot be eliminated through diversification

Expected rate of return (r HAT)

The rate of return expected to be realized from an investment which is the mean value of the probability distribution of possible outcome

Expected rate of return

The rate of return expected to be realized from an investment, calculated as the mean of the probability distribution of its possible returns.

Diversification

The result of adding additional assets to a portfolio, when the returns of the individual assets are non-correlated.

Realized rate of return

The return that is actually earned

Stand alone risk

The risk associated with an investment that is held by itself (in isolation) it is the TOTAL RISK ASSOCIATED WITH INVESTMENT

Investment-Grade bond

The term applied to bonds that are judged by their rating agency as being likely to pay their interest and maturity obligations.

Beta Coefficient

The term applied to the risk of an asset that is measured by the standard deviation of the asset's expected returns.

Debenture

The term used to describe an unsecured, or non-collateralized, bond.

Capital Asset Pricing Model (CAPM)

This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient.

Coefficient of variation

This statistical value provides a standardized measure of a security's risk per unit of return, and is useful in comparing the expected returns of different investments.

Term Loan

This type of debt transaction is privately negotiated between a corporate borrower and a financial institution to be repaid using a series of payments containing interest and principal over a period of two to thirty years.

Do Corporate debt holders have priority over stockholders with regards to distribution of earnings and liquidation of assets.

Yes, they must be paid before stock holders are paid

Bond

a long-term debt instrument

correlation coefficient

a measure of the degree of relationship between two variables

Can a firm be forced in to bankruptcy if it misses a preferred stock dividend payment

no

Does preferred stock have a higher priority claim to distributions made by the firm than common stock holders

yes