buisness finance exam 2
Some high-quality bond issues establish payment to the sinking fund that are not sufficient to redeem the entire issue. As a consequence, there is the possibility of a large ------ at maturity
"balloon payment"
What is the value of a stock if next year's dividend is $6, the discount rate is 11 percent and the constant rate of growth is 3 percent?
$6/(.11-.03) = $75
Issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
suppose a project's operating cash flow is $150. The firm anticipates a $30 investment in net working capital and $80 in capital spending. What is the projects' cash flow ?
(150-30-80=40)
A corporation issues 50,000 bonds at a face value of $1,000 each. The bonds mature in 5 years and have a coupon rate of 7 percent. What will the total annual interest expense be for the corporation?
(50,000 x 1,000 x 0.07 = $3,500,000)
suppose you bought 100 shares of Banks & Bower, inc. For $50 a share. During the year, B&B paid of $0.50 per share dividend. At year end, B&B was selling for $60 a share. What is your total percentage return?
(60-50+0.50)/50=21%
Given the following data, what is the operating cash flow? EBIT=$80 Depreciation=$20 Taxes=$30
(80+20-30=70)
Suppose a stock had an initial price of $87 per share, paid a dividend of $1.60 per share during the year, and had an ending share price of $102. Capital gain yield=
(End price-Beginning price)/Beginning price (102-87)/87=17.24%
Suppose a stock had an initial price of $87 per share, paid a dividend of $1.60 per share during the year, and had an ending share price of $102. Compute the percentage total return.
(End price-Beginning price+Dividends)/Beginning price (102-87+1.6)/87=19.08%
You purchased 290 shares of a particular stock at the beginning of the year at a price of $75.53. The stock paid a dividend of $1.05 per share, and the stock price at the end of the year was $82.04. What was your dollar return on this investment?
(Selling price + Dividend received - Purchase price)×Number of stocks (82.04+1.05-75.53)X290=2192.4
----- on preferred stock are either cumulative or non-cumulative, most are cumulative
...Dividends payable
if a firm's sales estimate used in its base case analysis is 1,000 units per year and they anticipate the upper and lower bounds to be +/- 15%, what is the "best case" for units sold per year.
1,000 x 1.15
Some sinking funds start about ---- years after the initial issuance
10
What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%.
11.78% R=((1.75x(1.08))/50) +.08
suppose you buy a share of stock for $100. At the end of the one year the stock price is $114 and a $1 dividend is paid. If you do not sell the stock, your total annual return is.
15% (1/100) + ((114-100)/100)
A firm decides to raise money by issuing 5 million bonds with a par value of 5,000 each for 10 years at a coipon rate of 7 percent. At the time of issue, the bonds were solf for 5,500 each. What will the par value of the bonds be in year 5?
5,000 per bond
if the rate of inflation is 3 percent and the real rate of return is 9 percent, the nominal rate is approximately ---- percent
9% + 3= 12%
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.70%
What is the profitability index for a project with an initial cash outflow of $30 and subsequent cash inflow of $80 in year one and $20 in year two if the discount rate is 12%?
=((80/1.12)+(20/1.12^2))/30=2.91
------pledges all the real property owned by the company
A blanket mortgage
only occurs if the market price exceeds the original cost
A capital gain
-------can be swapped for a fixed number of shares of stock any time before maturity at the holder's option.
A convertible bond
structure probably reflects the believed that inflation will be falling in the future
A downward-sloping term
means that a company that wishes to sell stock must first offer it to the existing stockholders before offering it to the general public.
A preemptive right
is a change in the firm's overall future cash flow that comes about as a direct consequence of the decision to take that project.
A relevant cash flow for a project
The highest rating a firm's debt can have is -----or-----, and such debt is judged to be the best quality and to have the lowest degree of default risk
AAA, Aaa
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds? $60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
Depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.
Accelerated Cost Recovery System (ACRS)
establishes its life for tax purposes
An assets class
Investment-grade bonds are bonds rated at least ------or ------
BBB by S&P, Baa by Moody's
The profitability index thus measures "-----", that is, the value created per dollar invested
Bang for the buck
-----frequently represent unsecured obligations of the company
Bonds
bond value =
C X [1-1/(1+r)^t]/r+F/(1+r)^t
-----are not usually operative during the first part of a bond's life
Call provisions
-----is a general term that frequently means securities that are pledged as security for payment of debt
Collateral
-----is commonly used to refer to any asset pledged on a debt
Collateral
------are relatively common, but the number has been decreasing in recent years
Convertible
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year.
Coupon Rate=$100/$1000=10%
A fixed place on the exchange floor where the DMM operates.
DMM's post
-----are classified according to the collateral and mortgages used to protect the bondholder.
Debt securities
are typically called notes, debentures, or bonds
Debt securities
can be short term (with maturities of one year or less) or long term (more than a year)
Debt securities
-----are elected at an annual shareholders meeting by a vote of the holders of a majority of shares who are present and entitles to vote
Directors
-----are elected each year at an annual meeting
Directors
Suppose a stock had an initial price of $87 per share, paid a dividend of $1.60 per share during the year, and had an ending share price of $102. Dividend yield
Dividend/Beginning price (1.6/87)=1.84%
What is the current yield on a 1,000 par value bond that sells for $900 if the coupon rate is 10 percent?
First myltiply .10 X $1000 to get payment. It's already annualized at $100. So, $100/$900= .11111 =11.11%
There are two drawbacks to bearer bonds.
First they are difficult to recover if they are lost or stolen. Second, because the company does not know who owns its bonds, it cannot notify bondholders or important events
The relationship among nominal returns, real returns, and inflation.
Fisher effect
-----cannot exceed the required return indefinitely, but it certainly could do so for some number of years
Growth rate
The ----is simply the discount rate that makes the NPV equal to zero is important because it tells us how to calculate the returns on more complicated investments
IRR
-----are the two most widely used techniques, particularly for larger firms.
IRR and NPV
is now available on the web, sometimes for a small fee
Level 2
allows users to view price quotes from all NASDAQ market makers. In particular , this level allows access to inside quotes
Level 2 of The NASDAQ
is for the use of market makers only.
Level 3 of The NASDAQ
In just the last few years use of a new type of call provision, a "----" call, has become very widespread in the corporate bond market. With such a feature, bondholder receive exactly what the bonds are worth if they are called.
Make-whole
The two leading bond-rating firms are ----- and standard and ----
Moody's, poor's
------are secured by a mortgage on the real property of the burrower
Mortgage securities
The steeper the resulting line is, the greater the sensitive of the estimated ---to the projected value of the variable being investigated
NPV
The ------is actually negative, meaning that taking it diminishes the value of the shareholder's equity. The opposite is true for the longer-term investment- it increases share value
NPV of the shorter-term investment
Because the bond market is almost entirely----, it has historically had little or no transparency
OTC
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Sunk cost Erosion Opportunity cost Marginal cost Side effect
Opportunity cost
Assume a bond has a $1,000 par value, a coupon rate of 6 percent, annual interest payments, and 7 years to maturity. If the yield on similar bonds is 8 percent, what is the current market value of this bond?
PV = (.06x1000) x (1-1/1.08^7)/.08 + (1000/1.08^7) = 895.87
Which one of the following indicators offers the best assurance that a project will produce value for its owners? Positive NPV Negative rate of return Positive AAR Positive IRR PI equal to zero
Positive NPV
means only that the holders of the preferred shares must receive a dividend before holder of common shares are entitled to anything
Preference
are cumulative and are not paid in a particular year, they will be carried forwards as an arrearage
Preferred dividends
--------are convenient and easily understood means of summarizing much of the relevant information for a project. To prepare these statements, we will need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs. We will also need to know the total investment required, including any investment in networking capital
Pro-forma financial statements
Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? Consent-form Straight Proxy Cumulative In absentia
Proxy
Unlike DMM's and floor brokers, ----do not operate on the floor of the stock exchange
SLP's
What is the market called that facilitates the sale of shares between individual investors? Inside Initial Secondary Primary Proxy
Secondary
-------indicates preference in position over other lenders
Seniority
----is useful for pointing out where forecasting errors will do the most damage, but it does not tell us what to do about possible errors.
Sensitivity analysis
control the corporation through the right to elect the directors.
Shareholder
is sometimes referred to as unfunded debt
Short term debt
What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early? Bearer account Premium fund Sinking fund Registered account Call account
Sinking fund
-----makes it more difficult for a minority shareholder to elect a director when there is cumulative voting because there are fewer directors to be elected at one time
Staggering
-----makes takeover attempts less likely to be successful because it make it more difficult to vote in a majority of new directors
Staggering
can "freeze out": minority shareholders
Straight voting
3 Nasdaq markets
The NASDAQ global select market, the NASDAQ global market, and the NASDAQ capital market.
are essentially investment firms that agree to be active participants in stocks assigned to them. Their job is to regularly make a one sided market, they trade purely for their own accounts, so they do not represent customers.
The SLPS
indicates the person's job or position. Clerks, runners, visitors, exchange officials, and so on wear particular colors to identify themselves.
The color of the coat
include all the changes in the firms future cash flows
The incremental cash flows for a project
is the length of time it takes to recover our initial investment or get our bait back
The payback
is the basic component underlying every interest rate
The real rate of interest
is a reflection of the term structure of interest rates
The shape of the yield curve
means the flow of customers' orders to buy and sell stocks
The term order flow
are exempt from state income taxes
Treasury issues
A plot of the yields on Treasury notes and bonds relative to maturity.
Treasury yield curve
is a liability of the firm. If it is not paid the creditors can legally claim the assets of the firm.
Unpaid debt
are not debts of the firm
Unpaid preferred dividends
-----. The coupon payments are adjustable. The adjustment are tied to an interest rate index such as the treasury bill interest rate or the 30-year treasury bond rate
With floating-rate bonds
if a stock has returns of 10 percent and 20 percent over 2 years, the geometric average rate of return can be calculated by.
[(1.10)(1.20)]^5-1
An asset with cash flows that grow at a constant rate forever is called
a growing perpetuity
In the United Kingdom, a debenture is -----
a secured obligation
An investment should be (rejected/accepted) if the net present value is positive and (rejected/accepted) if it is negative, this is the net present value rule
accepted, rejected
With cumulative voting, the directors are elected
all at once
Dividends paid to stockholders (are/are not) tax deductible
are not
corporate bonds are/are not liquid, treasury bonds are/are not liquid
are not, are
The return earned in an average year over a particular period.
arithmetic average return
The price at which the dealer will sell is called the
ask price
The price a dealer is willing to take for a security.
asked price
Because the true NPCV is unknown, the ------seeks clues to assess whether the estimated NPX is reliable
astute financial manager
An investment's average net income divided by its average book value.
average accounting return (AAR)
some measure of average accounting profit/ some measure of average accounting value=
average accounting return AAR
Based on the------, a project is acceptable if its average accounting return exceeds a target average accounting return
average accounting return rule
A bond issued without record of the owner's name; payment is made to whomever holds the bond.
bearer form
The price a dealer is willing to pay for a security.
bid price
The difference between the bid price and the asked price.
bid-ask spread
As we mentioned in our previous chapter, a --- is normally an interest-only loan, meaning that the borrower will pay the interest every period, but none of the principle will be repaid until the end of the loan
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 that are generically called
bonds
An agent who arranges security transactions among investors.
broker
The DMM ensures that there is always a ----or -----available, thereby promoting market liquidity
buyer, seller
The amount by which the call price exceeds the par value of the bond.
call premium
Bond during period in which it cannot be redeemed by the issuer.
call protected bond
Agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity.
call provision
The dividend growth rate, or the rate at which the value of an investment grows.
capital gains yield
The situation that exists if a firm has positive net present value projects but cannot obtain the necessary financing.
capital rationing
The coupon rate has a floor and a ceiling, meaning that the coupon is subject to a minimum and a maximum. In this case, the coupon rate is said to be "---" and the upper and lower rates are sometimes called the----
capped, collar
We are always interested in after-tax cash flow because taxes are definitely a
cash outflow
The price of a bond net of accrued interest; this is the price that is typically quoted.
clean price
----bonds, which have a coupon payment
coco
Two recent types of executive bonds include-----, which have a coupon payment and------, which are zero coupon bonds
coco bonds, nono bonds
Equity without priority for dividends or in bankruptcy.
common stock
The case of zero growth is one we've already seen. A share of -----in a company with a --------is much like a share of preferred stock
common stock, constant dividend
Taking into account the managerial options implicit in a project.
contingency planning
The net present value of an investment represents the difference between the investment's: cost and its net profit. cash inflows and outflows. assets and liabilities. cost and its market value. cash flows and its profits.
cost and its market value.
the stated interest payment made on a bond
coupon
C= R= T= F=
coupon paid each period rate per period number of periods bonds face value
A bond?s annual interest divided by its face value is referred to as the: yield-to-maturity. coupon rate. market rate. call rate. current yield.
coupon rate.
Value of a bond depends on the present value of its ----and the present value of the------
coupons, face amount
The person or firm making the loan is called the----, or-----.
creditor, lender
Debt is not an ownership interest in the firm. ------ generally do not have voting power
creditors
The debt ratings are an assessment of the ------of the corporate issuer
creditworthiness
A procedure in which a shareholder may cast all votes for one member of the board of directors.
cumulative voting
A bond's coupon payment divided by its closing price.
current yield
An agent who buys and sells securities from inventory.
dealer
The DMM's formerly known as specialist's act as ----in particular stocks. Typically, each stock on the NYSE is assigned to a single DMM.
dealers
Unsecured debt, usually with a maturity of 10 years or more.
debenture
A -----represents something that must be repaid, it is the result of borrowing money
debt
The corporation borrowing the money is called the----, or------
debtor, borrower
The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
default risk premium
Bond call provision prohibiting the company from redeeming the bond prior to a certain date.
deferred call provision
The tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate.
depreciation tax shield
NYSE members who act as dealers in particular stocks. Formerly known as "specialists."
designated market makers (DMMs)
If cumulative voting is permitted, the total number of votes that each shareholder may cast is determined first. This is usually calculated as the number of shares multiplied by the number of
directors to be elected
the price of a bond included accrued interest, also known as the full or invoice price, this is the price the buyer actually pays
dirty price
(a) Calculating the present value of a future cash flow to determine its value today. (b) The process of valuing an investment by discounting its future cash flows.
discounted cash flow (DCF) valuation
Payments by a corporation to shareholders, made in either cash or stock.
dividend
A model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate.
dividend growth model
Total dollar return
dividend income capital gain (or loss)
A stock's expected cash dividend divided by its current price.
dividend yield
valuation of stock using a zero growth model?
dividend/discount
Operating cash flow=
earnings before interest and taxes +depreciation - taxes
In calculating depreciation under current tax law, the ----and -----of the asset are not an issue
economic life, future market value
Market in which security prices reflect available information.
efficient capital market
The hypothesis that actual capital markets, such as the New York Stock Exchange, are efficient.
efficient markets hypothesis (EMH)
Websites that allow investors to trade directly with one another.
electronic communications networks (ECNs)
Some sinking dunds establish -----over the life of the bond
equal payment
Securities issued by corporations may be classified roughly as ---- securities and ----- securities
equity, debt
The cash flows of a new project that come at the expense of a firm's existing projects.
erosion
the principle amount of a bond that is repaid at the end of the term. Also known as par value
face value
Bonds that drop into junk territory from above are called "-----"
fallen angels
NYSE members who execute customer buy and sell orders.
floor brokers
If out NPV estimate turns out to be very sensitive to relatively small changes in the projected value of some component of project cash flow, then the -----associated with that variable is high
forecasting risk
the possibility that errors in projected cash flows will lead to incorrect decisions. also estimation risk
forecasting risk
A PE ratio that is based on estimated future earnings is called a
forward PE ratio
Investors are thinking about loaning money for various lengths of time recognize that ----erodes the value of the dollars that will be returned
future inflation
There are a couple of other, smaller room that you normally don't see, one of which is called the
garage
The average compound return earned per year over a multiyear period.
geometric average return
The situation that occurs when a business cannot raise financing for a project under any circumstances.
hard rationing
If shareholders are granted a preemptive right they will: have priority in the purchase of any newly issued shares. be able to choose the timing and amount of any future dividends. be paid dividends prior to the preferred shareholders during the preemptive period. be given the choice of receiving dividends either in cash or in additional shares of stock. be entitled to two votes per share of stock.
have priority in the purchase of any newly issued shares.
If investors believe that the rate of inflation will be higher in the future, then long-term nominal interest rates will tend to be (lower/higher) than short-term rates
higher
Investors recognize that issuers other then the treasury may or may not make all the promised payments on a bond, so they demand a -----as compensation for this risk
higher yield
The cash flows that are expected to occur later in a projects life are probably more uncertain. Arguably, a payback period rule adjusts for the extra riskiness of later cash flows, but it does so in a rather draconian fashion- by ----
ignoring them altogether
The difference between a firm's future cash flows with a project and those without the project.
incremental cash flows
The------ consist of any and all changes in the firm's future cash flows that are a direct consequence of taking the project
incremental cash flows for project evaluation
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: opportunity cash flows. incremental cash flows. directly impacted flows. deviated projections. eroded cash flows.
incremental cash flows.
The written agreement between the corporation and the lender detailing the terms of the debt issue.
indenture
If the constant growth rate exceeds the discount rate, then the stock price is
infinantly large
The portion of a nominal interest rate that represents compensation for expected future inflation.
inflation premium
A particular interesting type of floating-rate bond is an -------bond. Such bonds have coupons that are adjusted according to the rate of inflation
inflation-linked
Total cash is stock is sold=
initial investment + total return
The highest bid quotes and the lowest ask quotes for a security.
inside quotes
Staggering may serve as a beneficial purpose. It provides "------," that is, vote in a continuity of new directors
institutional memory
The corporation's payment of -------is considered a cost of doing business and is fully tax deductible.
interest on debt
The risk that arises for bond owners from fluctuating interest rates is called
interest rate risk
The compensation investors demand for bearing interest rate risk.
interest rate risk premium
The discount rate that makes the net present value of an investment zero.
internal rate of return (IRR)
Interest is payable semiannually on -----1 and ----1 of each year to the person in whose name the bond is registered at the close of business on ----15 or ----15, respectively
july, January, June, December
is designed to provide a timely, accurate source of price quotations. These prices are freely available over the internet
level 1 of The NASDAQ
Unless a dividend is declared by the board of directors of a corporation, it is not a ----of the corporation
liability
A protective covenant: limits the actions of the borrower. guarantees the market price of a bond will never be less than par value. guarantees the interest and principal payments will be paid in full on a timely basis. prevents a bond from being called. protects the borrower from unscrupulous practices by the lender.
limits the actions of the borrower.
two of the possible consequences of bankruptcy
liquidation or reorganization
The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.
liquidity premium
The present value of the face amount will be much more volatile with a -----term bond.
longer
Opportunities that managers can exploit if certain things happen in the future. Also known as "real" options.
managerial options
Specified date on which the principal amount of a bond is paid.
maturity
As of 2006, a member is the owner of a trading license on the NYSE.
member
If you buy a bond between coupon payment dates, the price you pay is usually (more,less) than the price you are quoted
more
The legal document that describes the mortgage is called a ------or----
mortgage trust indenture, trust deed
The possibility that more than one discount rate will make the net present value of an investment zero.
multiple rates of return
State and local government also borrow money by selling notes and bonds. Such issues are called ------and-----
municipal notes, bonds
Because of the enormous tax break they receive, the yields on -----bonds are much lower than the yields on -----bonds.
municipal, taxable
A situation where taking one investment prevents the taking of another.
mutually exclusive investment decisions
The difference between an investment's market value and its cost.
net present value (NPV)
A graphical representation of the relationship between an investment's net present value and various discount rates.
net present value profile
Interest rates or rates of return that have not been adjusted for inflation.
nominal rates
-----bonds, which are zero coupon bonds
nono
A symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation.
normal distribution
Unsecured debt, usually with a maturity of under 10 years.
note
earnings before interest and taxes +depreciation - taxes
operating cash flow
project operating cash flow - project change in networking capital - project capital spending =
operating cash flow
The cash flow from assets have three components
operating cash flow, capital spending, and additions to net working capital
Total cash flow for the year=
operating cash flow- change in NWC - Capital spending
The most valuable alternative that is given up if a particular investment is undertaken.
opportunity cost
requires us to give up a benefit
opportunity cost
The flow of customer orders to buy and sell securities.
order flow
Most trading in bonds takes place
over the counter, or OTC
the principle amount of a bond that is repaid at the end of the term, also known as face value
par value
what are the cash flaws involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest rate is 5 percent.
pay 800 today and receive 1,000 at the end of 5 years
A distinctive feature of corporations is that they have shares of stock on which they are authorized by law to
pay dividends to their shareholders
Among smaller firms, ----is used just about as much as NPV and IRR
payback
The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.
payback period
Despite its shortcomings, the -----I often used by large and sophisticated companies when they are making relatively minor decisions
payback period rule
Based on the----, an investment is acceptable if its calculated payback period is less than some prespecified number of years.
payback rule
The nominal rate on an investment is the -------in the number of dollars you have.
percentage change
The real rate on an investment is the percentage change in how much you can buy with your dollars, in other words, the -----
percentage change in your buying power
If a project has a (negative/positive) NPV, then the present value of the future cash flows must be bigger than the initial investment
positive
Shareholder sometimes have the right to share proportionally in any new stock sold. This is called
preemptive right
Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.
preferred stock
bond value =
present value of the coupons + present value of the face amount amount
The market in which new securities are originally sold to investors.
primary market
From out earlier discussion, recall that the stock market consists of a ------and a -------
primary market, secondary market
the present value of an investment's future cash flows divided by its initial cost. Also benefit-cost ratio
profitability index (PI)
Project cash flow=
project operating cash flow - project change in networking capital - project capital spending
A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest.
protective covenant
A grant of authority by a shareholder allowing another individual to vote his or her shares.
proxy
Much of the voting in large public corporations is actually done by
proxy
The two major forms of long-term debt are -----and ------
public issue,private issue
The holder has the right to redeem the note at par on the coupon payment date after some specified amount of time. This is called a ----
put provision
Interest rates or rates of return that have been adjusted for inflation.
real rates
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: produce a positive cash flow from assets. offset its total expenses. offset its fixed expenses. produce a positive annual cash flow. recoup its initial cost.
recoup its initial cost.
The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record.
registered form
The excess return required from an investment in a risky asset over that required from a risk-free investment.
risk premium
The determination of what happens to net present value estimates when we ask what-if questions.
scenario analysis
The market in which previously issued securities are traded among investors.
secondary market
In the-----, a dealer stands ready to buy securities from investors wishing to sell them and sell securities to investors wishing to buy them
securities markets
Debts are sometimes labeled as -----or -----to indicate seniority
senior, junior
Investigation of what happens to net present value when only one variable is changed.
sensitivity analysis
An account managed by the bond trustee for early bond redemption.
sinking fund
Early repayment in some form is more typical and is often handled through a
sinking fund
Payback rule tends to favor investments that free up cash for other uses more quickly. This could be very important for-----, it would be less for a----.
small business, large corporation
The amount of the call premium usually becomes (smaller/bigger) over time
smaller
The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.
soft rationing
The difference between the bid and ask prices is called the----, and it is the basic source of dealer profits
spread
The assumption that evaluation of a project may be based on the project's incremental cash flows.
stand-alone principle
The positive square root of the variance.
standard deviation
A put bond allows the holder to force the issuer to buy the bond back at a -----price. The put feature is there just the reverse of the call provision and is a relatively new development
stated
Structured notes are bonds that are based on----, ----, -----, or----
stocks, bonds, commodities, currencies
Options for future, related business products or strategies.
strategic options
Some debt is subordinated, as in, for example, a -----
subordinated debenture
A cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision.
sunk cost
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): forgotten cost. sunk cost. opportunity cost. variable cost. fixed cost.
sunk cost.
Investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market (i.e., offering to either buy or sell). They trade purely for their own accounts.
supplemental liquidity providers
A useful variation on our basic definition of operating cash flow is the
tax shield approach
The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
taxability premium
The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.
term structure of interest rates
An indenture is sometimes referred to as
the deed of trust
Treasury yield depends on the three component that underlie the term structure:-----, expected-----, and the -----premium
the real rate, future inflation, interest rate risk
Treasury notes and bonds have three important features that we need to remind you of:
they are default free, they are taxable, and they are highly liquid
A positive covenant is a "-----" type of covenant. It specifies an action that the company agrees to take or a condition the company must abide by.
thou shalt
A negative covenant is a "-----" type of covenant. It limits or prohibits actions that the company might take.
thou shalt not
total cash flow - change in NWC - capital spending
total cash flow
intital investment + total return =
total cash is stock is sold
dividend income + capital gain (or loss)=
total dollar return
Corporate bond dealers are now required to report trade information through what is known as the
trade reporting and compliance engine (TRACE)
Bonds issued by the British government are called -----
treasury stock
A DMM maintains a------, meaning that the DMM continually posts and updates bid and ask prices
two sided market
The biggest borrower in the world-by a wide margin-is everybody's favorite family member
uncle sam.
The New York stock exchange does not allow companies to create classes of publicly traded common stock with
unequal voting rights
To prepare Pro-forma financial statements, we will need estimates of quantities such as
unit sales, the selling price per unit, the variable cost per unit, and total fixed costs. We will also need to know the total investment required, including any investment in networking capital
When long-term rates are higher than short term rates, we say that the term structure is (upward/downward) sloping, and when short-term rates are higher, we say it is (upward/downward)sloping.
upward,downward
The average squared difference between the actual return and the average return.
variance
The rate required in the market on a bond.
yield to maturity (YTM)
A bond that makes no coupon payments, and thus is initially priced at a deep discount.
zero coupon bond