Finance Exam 2

Government Bonds

Zero Coupon Bonds

bonds that make no coupon payments and are thus initially priced at a deep discount

Catastrophe (Cat) Bonds

Income Bonds

Convertible Bond…

can be swapped for a fixed number of shares of stock at any time before maturity at the holder’s option

Put Bond

allows the holder to force the issuer to buy back the bond at a stated price; this is the reverse of the call provision

Coupon

is the stated interest payment made on a bond (i.e., $120)

Face value, or par value…

is the principal amount of a bond that is repaid at the end of the term (i.e., $1,000) Future Value

Coupon rate is…

the annual coupon divided by the face value of the bond (i.e., $120/$1,000 = .12, or 12%) this is the payment

Maturity is the…

specified date on which the principal amount of a bond is paid (i.e., 30 years)

To find the value of a bond at a particular point in time, we need the following pieces of information:

Number of periods remaining until maturity, Face value, Coupon, Yield to maturity (YTM), or yield, which is the rate required in the market on a bond

DISCOUNT BOND

Premium bond

define indenture

is the written agreement between the corporation (the borrower) and the lender detailing the terms of the debt issue

municipal bond

FLOATING-RATE BONDS

Clean price

is the price of a bond net of accrued interest this is the price that is typically quoted

Dirty price

is the price of a bond including accrued interest, also known as the full or invoice price

Real rates..

are interest rates or rates of return that have been adjusted for inflation

Nominal rates…

are interest rates or rates of return that have not been adjusted for inflation

Fisher effect

the relationship between real rates, nominal rates, and inflation (1 + R) = (1 + r)(1 + h)

 R = nominal rate

 r = real rate

 h = expected inflation rate

Yield curve

graphical representation of the term structure

Normal yield curve

Upward-sloping: long-term yields are higher than short-term yields

Inverted yield curve

downward-sloping; long-term yields are lower than short-term yields

Dividend Growth Model requirements

1. The growth of all future dividends must be constant,

2. The growth rate must be smaller than the discount rate ( g < R), and

3. The growth rate must not be equal to the discount rate (g ≠ R)

New York Stock Exchange (NYSE)

largest stock market in the world

Broker

matches buyers and sellers for a fee

Dealer

trades with inventory for bid and ask prices

NASDAQ

not a physical exchange; computer-based quotation system

Bond Ratings

In investment, the bond credit rating represents the creditworthiness of corporate or government bonds.

Similarities between Stocks and Bonds

Both provide long-term funding for the organization, Both are future funds that an investor must consider, Both have future periodic payments, Both can be purchased in a marketplace at a price “today”

Differences between Stocks and Bonds

From the firm’s perspective: a bond is a long-term debt and stock is equity, From the firm’s perspective: a bond gets paid off at the maturity date; stock continues indefinitely, A bond has coupon payments and a lump-sum payment; stock has dividend payments forever, Coupon payments are fixed; stock dividends change or “grow” over time

Longer-term bonds have greater interest rate sensitivity because a larger portion of a bond's value comes from the face amount

In financial markets the difference between the BLANK and the ask price is known as the spread.

bid price

The main reason for considering non constant growth in dividends is to allow for BLANK growth rates over BLANK

supernormal; some finite length of time

Which is the formula used to estimate a stock price based on the benchmark PE?

Pt= Benchmark PE ratio × EPSt

In a BLANK board, only a fraction of the directorships are up for election at any one time.

staggered, stagger, or classified

With BLANK voting, the directors are elected one at a time and the only way to guarantee a seat is to own 50 percent plus one share.

straight