MB338 Finance — Test 3 Study Guide

A set of vocabulary flashcards summarizing key terms and concepts from the MB338 Finance study guide.

Bond Market vs. Stock Market

The bond market involves debt securities, while the stock market represents ownership in companies.

Ownership vs. Debt

Stocks signify ownership (equity), whereas bonds denote a loan to the issuer (debt).

Fixed Interest Payments

Bonds provide fixed, contractual interest payments (coupons), while stocks offer variable returns.

Priority in Bankruptcy

Bondholders are prioritized over stockholders in the event of bankruptcy.

Maturity Date

The specific date when a bond's principal is repaid; stocks have no maturity.

Yield to Maturity (YTM)

The total return expected on a bond if held until maturity.

Coupon Rate

The annual interest percentage stated on a bond, determining the fixed coupon payment.

Inverse Relationship Between YTM and Bond Price

When YTM rises, bond prices fall; when YTM falls, bond prices rise.

Par Bond

A bond that trades at its face value when the coupon rate equals YTM.

Discount Bond

A bond that trades below face value when the coupon rate is lower than YTM.

Premium Bond

A bond that trades above face value when the coupon rate is higher than YTM.

Interest Rate Risk

The risk to bond investors when interest rates rise, causing bond prices to fall.

Term Structure of Interest Rates

Describes the relationship between bond yields and their maturities, often illustrated as a yield curve.

Inflation and Bonds

Rising inflation diminishes the purchasing power of fixed coupon payments.

Bond Ratings

Assessments of a bond issuer's creditworthiness that influence investor decisions.

Investment-Grade Bonds

Bonds rated BBB/Baa and above, indicating lower risk and lower yield.

Junk Bonds

Bonds rated BB/Ba and below, indicating higher risk and potentially higher yield.

Mortgage-Backed Securities (MBS)

Bonds backed by a pool of home mortgages that provide cash flow to investors.

CAPM Formula

The formula E(R) = Rf + β(Rm - Rf) calculates the expected return on an asset based on its systematic risk.

Systematic Risk

Market risk that affects the entire market and cannot be eliminated through diversification.

Unsystematic Risk

Risk unique to a specific company or industry, which can be mitigated through diversification.

Standard Deviation (SD)

A measure of the volatility or risk of an investment, indicating the dispersion of returns.