EXAM 2 concepts

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Olivares, Incorporated, bonds mature in 17 years and have a rate of 5.4%. If the market rate of interest increases, then the:

Market price of the bond will decrease

Chavez & Hwang just issued 15-year, 6.4%, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

The internal rate of return is defined as the:

Discount rate which causes the net present value of a project to equal zero

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

Discounted payback period

The operating cash flow for a project should exclude which one fo the following?

Interest Expense

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

A project has a net present value of zero. Given this information:

The project's cash inflows equal its cash outflows in current dollar terms

Compare and contrast three securities we have studied thus far in the class: bonds, common stock, and preferred stock. Discuss ways that these securities are similar and/ or different.

Bonds are categorized as a debt security and are guaranteed a payback. These are similar to a preferred stock. I characterize preferred stock as the happy medium between common stock and bonds. They are a hybrid stock, so they're labeled as stock but are the first to get paid so there is more security. Preferred stock cannot vote on issues within the company. Stocks are equity securities. Common stock is the most risky because payback is not guaranteed, but they can vote on important issues like the board of directors.

Which one of the following methods predicts the amount by which the value of a firm will change if a project's accepted?

Net present value

The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the:

Protective covenants