Finance Midterm Exam- Chapters: 1,2,5,6,7,8,9
annuity
A level stream of cash flows for a fixed period of time
stated interest rate
The interest rate expressed in terms of the interest payment made each period. Also known as the quoted interest rate.
dirty price
The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
zero coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
current yield
a bond's annual coupon divided by its price
deferred call premium
a call provision prohibiting the company from redeeming a bond prior to a certain date
cash flow to creditors
a firm's interest payments to creditors less net new borrowing
Working capital
a firm's short-term assets and liabilities
proxy
a grant of authority by a shareholder allowing another individual to vote his or her shares
net present value profile
a graphical representation of the relationship between an investment's NPVs and various discount rates
Dividend Growth Model
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
protective convenant
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
treasury yield curve
a plot of the yields on treasury notes and bonds relative to maturity
straight voting
a procedure in which a shareholder may cast all votes for each member of the board of directors
cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors
mutually exclusive investment decision
a situation in which taking one investment prevents the taking of another
marginal tax rate
amount of tax payable on the next dollar earned
sinking fund
an account managed by the bond trustee for early bond redemption
broker
an agent who arranges security transactions among investors
dealer
an agent who buys and sells securities from inventory
call provision
an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity
annuity due
an annuity for which the cash flows occur at the beginning of the period
perpetuity (consols)
an annuity in which the cash flows continue forever
average accounting return
an investment's average net income divided by its average book value
debenture
an unsecured debt, usually with a maturity of 10 years or more
note
an unsecured debt, usually with a maturity under 10 years
Free cash flow
another name for cash flow from assets
member
as of 2006, a member is the owner of a trading license on the NYSE
operating cash flows
cash generated from a firm's normal business activities
cash flow to stockholders
dividends paid out by a firm less net new equity raised
common stock
equity without priority for dividends or in bankruptcy
noncash items
expenses charged against revenues that do not directly affect cash flow, such as depreciation
real rates
interest rates or rates of return that have been adjusted for inflation
nominal rates
interest rates or rates of return that have not been adjusted for inflation
dividends
payments of cash from a corporation to its stockholders, made in either cash or stock
over the counter market
securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories
stakeholder
someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
preferred stock
stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
call premium
the amount by which the call price exceeds the par value of a bond
payback period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
coupon rate
the annual coupon divided by the face value of a bond
interest rate risk premium
the compensation investors demand for bearing interest rate risk
net present value
the difference between an investment's market value and its cost
bid-ask spread
the difference between the bid price and the asked price
Internal rate of return
the discount rate that makes the NPV of an investment zero
capital gains yield
the dividend growth rate, or the rate at which the value of an investment grows
bearer form
the form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bond
registered form
the form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record
effective annual rate (EAR)
the interest rate expressed as if it were compounded once per year
discounted payback period
the length of time required for an investment's discounted cash flows to equal its initial cost
primary market
the market in which new securities are originally sold to investors
secondary market
the market in which previously issued securities are traded among investors
Capital Structure
the mixture of debt and equity maintained by a firm
liquidity premium
the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
default risk premium
the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
taxability premium
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
inflation premium
the portion of a nominal interest rate that represents compensation for expected future inflation
Agency problem
the possibility of conflict of interest between the stockholders and management of a firm
profitability index (benefit-cost ratio)
the present value of an investment's future cash flows divided by its initial cost
bid
the price a dealer is willing to pay for a security
asked price
the price a dealer is willing to take for a security
clean price
the price of a bond net of accrued interest; this is the price that is typically quoted
Face Value or Par Value (of a Bond)
the principle amount of a bond that is repaid at the end of the term.
Capital Budgeting
the process of planning and managing a firm's long-term investments
discounted cash flow (DCF) valuation
the process of valuing an investment by discounting its future cash flows
yield to maturity
the rate required in the market on a bond
term structure of interest rates
the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
Fisher effect
the relationship between nominal returns, real returns, and inflation
maturity
the specified date on which the principal amount of a bond is paid
Coupon
the stated interest payment made on a bond
cash flow from assets
the total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and change in net working capital cash flow to creditors + cash flow to stockholders
indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue
average tax rate
total taxes paid divided by total income
