Module 13: Bonds and Stocks

A preferred dividend is not like interest on a bond - the board of directors may decide not to pay _____ on preferred shares. Dividends payable on preferred stock are either cumulative or noncumulative, although most are _______.

A preferred dividend is not like interest on a bond - the board of directors may decide not to pay dividends on preferred shares. Dividends payable on preferred stock are either cumulative or noncumulative, although most are cumulative.

A problem with the dividend-based approach to common stock valuation is that many companies don't pay dividends. When this is the case, we can use a benchmark __ ratio to approximate the value of a given stock

A problem with the dividend-based approach to common stock valuation is that many companies don't pay dividends. When this is the case, we can use a benchmark PE ratio to approximate the value of a given stock

A share of common stock in a company with a constant dividend is much like a share of preferred stock. The dividend on a share of preferred stock has zero growth and thus is _____ through time.Because the dividend is always the same, the stock can be viewed as an _____ _______

A share of common stock in a company with a constant dividend is much like a share of preferred stock. The dividend on a share of preferred stock has zero growth and thus is constant through time.Because the dividend is always the same, the stock can be viewed as an ordinary perpetuity

Regular interest payments that a corporation promises to make are called the bond's _____.

Regular interest payments that a corporation promises to make are called the bond's coupon.

The amount that will be repaid at the end of the loan-term is called the bond's ___ ____, or ___ ____.

The amount that will be repaid at the end of the loan-term is called the bond's face value, or par value.

The annual coupon divided by the face value is called the ____ rate.

The annual coupon divided by the face value is called the coupon rate.

A bond is normally an interest-only loan, meaning that the borrower will pay the _____ every period, but none of the ______ will be repaid until the end of the loan.

A bond is normally an interest-only loan, meaning that the borrower will pay the interest every period, but none of the principal will be repaid until the end of the loan.

A bond that sells in the market for its par value is called a ___ _____ bond.

A bond that sells in the market for its par value is called a par value bond.

Bond prices and interest rates always move in _____ directions. When interest rates rise, a bond's value, like any other present value, will _____. Similarly, when interest rates fall, bond values ___.

Bond prices and interest rates always move in opposite directions. When interest rates rise, a bond's value, like any other present value, will decline. Similarly, when interest rates fall, bond values rise.

Cumulative dividends represent the current preferred dividend plus all ______ (unpaid dividends) to be paid before common stock dividends can be paid. Non-cumulative dividend preferred does not have this feature.

Cumulative dividends represent the current preferred dividend plus all arrearages (unpaid dividends) to be paid before common stock dividends can be paid. Non-cumulative dividend preferred does not have this feature.

On the other hand, a _____ bond is a bond whose coupon rate is greater than the going market rate. Investors are willingly to pay ____ than face value to get this extra coupon amount.

On the other hand, a premium bond is a bond whose coupon rate is greater than the going market rate. Investors are willingly to pay more than face value to get this extra coupon amount.

Other common shareholder rights include: sharing proportionately in ______ paid, sharing proportionately in any ______ value, ____ on matters of importance (i.e., mergers), and the right to ____ any new stock sold - the preemptive right.

Other common shareholder rights include: sharing proportionately in dividends paid, sharing proportionately in any liquidation value, voting on matters of importance (i.e., mergers), and the right to purchase any new stock sold - the preemptive right.

Preferred stock has _____ over common stock in the payment of dividends and in liquidation. Its dividend is usually ____ and the stock is often without _____ rights. The stated value is the value paid to preferred stockholders in the event of _____.

Preferred stock has precedence over common stock in the payment of dividends and in liquidation. Its dividend is usually fixed and the stock is often without voting rights. The stated value is the value paid to preferred stockholders in the event of liquidation.

Some firms have more than one class of ______ stock. Often, the classes are created with unequal voting rights. A primary reason for creating multiple classes of stock has to do with ______ of the firm. If such stock exists, management of a firm can raise _____ capital by issuing nonvoting or limited-voting stock while still maintaining ______ of the firm.

Some firms have more than one class of common stock. Often, the classes are created with unequal voting rights. A primary reason for creating multiple classes of stock has to do with control of the firm. If such stock exists, management of a firm can raise equity capital by issuing nonvoting or limited-voting stock while still maintaining control of the firm.

Stock valuation is more difficult than bond valuation because the cash flows are ______, the life is ____, and the required rate of return is ______. The cash flows to stockholders consist of _____ plus a future sale price.

Stock valuation is more difficult than bond valuation because the cash flows are uncertain, the life is forever, and the required rate of return is unobservable. The cash flows to stockholders consist of dividends plus a future sale price.

When a bond's coupon rate is less than the going market rate of interest, investors are only willingly to pay something ____ than the bond's face value to make up for the difference. Because the bond sells for less than face value, it is said to be a _____ bond

When a bond's coupon rate is less than the going market rate of interest, investors are only willingly to pay something less than the bond's face value to make up for the difference. Because the bond sells for less than face value, it is said to be a discount 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, ____ _____ that are typically referred to as ____.

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 typically referred to as bonds.

premium bond

a bond who's stated interest rate is greater than the market rate of interest

discount bond

a bond whose stated interest rate is less than the market rate of interest

proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares

common stock

equity without priority for dividends or in bankruptcy

dividends

payments by a corporation to shareholders, made either in cash or stock

preferred stock

stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

coupon rate

the annual coupon divided by the face value of the bond

yield to maturity

the interest rate required in the market on a bond

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

time to maturity

the number of years until the face value of the bond is paid

face value

the principal amount of a bond that is repaid at the end of the term. Also called par value

maturity date

the specified date on which the principal amount of bond is paid

coupon

the stated interest payment made on a bond

indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue

Dividend growth model uses ______ perpetuity

Dividend growth model uses growing perpetuity

broker

an agent who arranges security transactions among investors

dealer

an agent who buys and sells securities from inventory

debenture

an unsecured debt, usually with a maturity of ten years or more

note

an unsecured debt, usually with a maturity under 10 years

As time passes, interest rates ____ in the marketplace. The cash flows from a bond, however, normally stay the same. As a result, the value of the bond will ______. When interest rates rise, the present value of the bond's remaining cash flows ______, and the bond is worth ____. When interest rates fall, the bond is worth ____.

As time passes, interest rates change in the marketplace. The cash flows from a bond, however, normally stay the same. As a result, the value of the bond will fluctuate. When interest rates rise, the present value of the bond's remaining cash flows declines, and the bond is worth less. When interest rates fall, the bond is worth more.

Bonds are bought and sold in large quantities every day. Most bond transactions are OTC (over-the-counter), therefore, the bond market is not very transparent. Daily bond trading volume ______ stock trading volume, but trading in individual bond issues tends to be very thin.

Bonds are bought and sold in large quantities every day. Most bond transactions are OTC (over-the-counter), therefore, the bond market is not very transparent. Daily bond trading volume exceeds stock trading volume, but trading in individual bond issues tends to be very thin.

Bonds have a variety of provisions spelled out in a legal document called the bond ______. Important provisions include the basic terms of the bonds, a description of property used as security (if any), the repayment arrangements - seniority, and details of the protective covenants.

Bonds have a variety of provisions spelled out in a legal document called the bond indenture. Important provisions include the basic terms of the bonds, a description of property used as security (if any), the repayment arrangements - seniority, and details of the protective covenants.

Dividends paid to common shareholders represent a _____ on the capital contributed to the corporation by the shareholders. Important characteristics of dividends include: the payment of dividends is at the ______ of the board, dividends are not ___ _______ for the paying firm, and dividends received by individuals are taxable at the long-term _____ ____ rate.

Dividends paid to common shareholders represent a return on the capital contributed to the corporation by the shareholders. Important characteristics of dividends include: the payment of dividends is at the discretion of the board, dividends are not tax deductible for the paying firm, and dividends received by individuals are taxable at the long-term capital gains rate.

Finally, the number of years until the face value is paid is called the bond's time to _____. Once the bond has been issued, the number of years to maturity ______ as time goes by.

Finally, the number of years until the face value is paid is called the bond's time to maturity. Once the bond has been issued, the number of years to maturity declines as time goes by.

Firms frequently pay to have their debt rated. The two leading bond-rating firms are Moody's and Standard and Poor's (S&P). The debt ratings are an assessment of the _____________ of the corporate issuer. The definitions of creditworthiness used by Moody's and S&P are based on how likely the firm is to ______ and the _______ creditors have in the event of a default. It is important to recognize that bond ratings are concerned only with the possibility of default; they do not measure _____ ____ risk

Firms frequently pay to have their debt rated. The two leading bond-rating firms are Moody's and Standard and Poor's (S&P). The debt ratings are an assessment of the creditworthiness of the corporate issuer. The definitions of creditworthiness used by Moody's and S&P are based on how likely the firm is to default and the protection creditors have in the event of a default. It is important to recognize that bond ratings are concerned only with the possibility of default; they do not measure interest rate risk

Government bonds are long-term debt instruments issued by a governmental entity. Treasury bonds are bonds issued by a ______ government; a state or local government issues _______ bonds. In the U.S., Treasuries are exempt from state _______ and "munis" are exempt from federal taxation.

Government bonds are long-term debt instruments issued by a governmental entity. Treasury bonds are bonds issued by a federal government; a state or local government issues municipal bonds. In the U.S., Treasuries are exempt from state taxation and "munis" are exempt from federal taxation.

However, the future sale price depends on the ______ paid after that point. Therefore, you can illustrate that the current stock price is ultimately the present value of all expected future dividends discounted at a rate (R) appropriate to the ______ of the cash flows

However, the future sale price depends on the dividends paid after that point. Therefore, you can illustrate that the current stock price is ultimately the present value of all expected future dividends discounted at a rate (R) appropriate to the riskiness of the cash flows

The other debt securities issued by corporations, such as _____ and ______ ____, have very similar characteristics to bonds and their value is calculated using the same procedures.

The other debt securities issued by corporations, such as debentures and unsecured notes, have very similar characteristics to bonds and their value is calculated using the same procedures.

The risk that arises for bond owners from fluctuating interest rates is called _____ ___ risk. How much interest rate risk a bond has depends on how _____ its price is to interest rate changes. This sensitivity depends on two things: the time to _____ and the ____ rate. You should keep the following in mind when looking at a bond: (1) all other things equal, the longer the time to maturity, the _____ the interest rate risk, and (2) all other things being equal, the lower the coupon rate, the _____ the interest rate risk.

The risk that arises for bond owners from fluctuating interest rates is called interest rate risk. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes. This sensitivity depends on two things: the time to maturity and the coupon rate. You should keep the following in mind when looking at a bond: (1) all other things equal, the longer the time to maturity, the greater the interest rate risk, and (2) all other things being equal, the lower the coupon rate, the greater the interest rate risk.

The stock market consists of a ____ market and a _____ market. New securities are originally sold to investors in the _____ market. Existing securities trade among investors in the _____ market. The NYSE and NASDAC are stock exchanges where securities are _____ traded.

The stock market consists of a primary market and a secondary market. New securities are originally sold to investors in the primary market. Existing securities trade among investors in the secondary market. The NYSE and NASDAC are stock exchanges where securities are actively traded.

The term common stockis usually applied to stock that has no special preference either in receiving _____ or in _______. Common stock shareholders elect the Board of Directors who, in turn, hire managers to carry out their directives. Shareholders, therefore, ______ the corporation through the right to elect the directors. Generally, only common stock shareholders have this right. A _____ is the grant of authority by a shareholder to another to vote his or her shares.

The term common stockis usually applied to stock that has no special preference either in receiving dividends or in bankruptcy. Common stock shareholders elect the Board of Directors who, in turn, hire managers to carry out their directives. Shareholders, therefore, control the corporation through the right to elect the directors. Generally, only common stock shareholders have this right. A proxy is the grant of authority by a shareholder to another to vote his or her shares.

This interest rate on a bond required in the market is called the bond's _____ __ ______. This rate is sometimes called the bond's ____ for short.

This interest rate on a bond required in the market is called the bond's yield to maturity (YTM). This rate is sometimes called the bond's yield for short.

To determine the value of a bond at a particular point in time, we need to know the number of _____ remaining until maturity, the ___ ____, the _____ and the current market ____ ____ for bonds with similar features. Given all this information, we can calculate the _____ ____ of the cash flows as an estimate of the bond's current market value, or bond value.

To determine the value of a bond at a particular point in time, we need to know the number of periods remaining until maturity, the face value, the coupon and the current market interest rate for bonds with similar features. Given all this information, we can calculate the present value of the cash flows as an estimate of the bond's current market value, or bond value.

par value bond

a bond who's stated interest rate is exactly the same as the market interest rate

dividend growth model

a model that determines the current price of a stock as its dividends next period divided by the discount rate less the dividend growth rate

protective covenant

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