FINA 5311 Chapter 7 Keyterms
efficient market
Market in which prices reflect all available information.
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:
call premium
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond
callable
Bonds issued by the U.S. government:
Are considered to be free of default risk
The price sensitivity of a bond increases in response to a change in the market rate of interest as the:
Coupon rate decreases and the time to maturity increases.
initial public offering (IPO)
First offering of stock to the general public.
payout ratio
Fraction of earnings paid out as dividends.
plowback ratio
Fraction of earnings retained by the firm.
Treasury bonds are:
Generally issued as semiannual coupon bonds.
discount rate
Interest rate used to compute present values of future cash flows.
fundamental analysts
Investors who attempt to find mispriced securities by analyzing fundamental information, such as firm performance and earnings prospects.
technical analysts
Investors who attempt to identify undervalued stocks by searching for patterns in past prices.
internal growth rate
Maximum rate of growth without external financing.
present value of growth opportunities (PVGO)
Net present value of a firm's future investments.
NYSE
New York Stock Exchange.
common stock
Ownership shares in a corporation.
A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent
The current yield exceeds the coupon rate.
spread
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the
intrinsic value
The present value of the cash payoffs anticipated by an investor in a security.
constant growth dividend discount model
Version of the dividend discount model in which dividends grow at a constant rate.
U. S. Treasury bonds are quoted
as a percentage of par.
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
increases at a decreasing rate
Real rates are defined as nominal rates that have been adjusted for which of the following?
inflation
The real rate must be less than the
nominal rate given a positive rate of inflation.
Interest rates that include an inflation premium are referred to as:
nominal rates
real rates
represents the change, if any, in your purchasing power as a result of owning a bond?
Bonds provide
tax benefits to issuers
The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:
taxes ad default risk
dividend discount model
Discounted cash-flow model which states that today's stock price equals the present value of all expected future dividends.
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
Market price of the bond will decrease
price-earnings multiple (P/E ratio)
Ratio of stock price to earnings per share.
primary offering
Sale of new securities by corporations.
random walk
Security prices change randomly, with no predictable trends or patterns.
sustainable growth rate
Steady rate at which a firm can grow without changing leverage; return on equity × plowback ratio.
