BFIN 300 Exam 2

Stock Market

A system for buying and selling shares of public companies

Bond Markets

where debt securities are originated and traded (U.S. treasury Bond)

commodity market

where buyers and sellers meet to exchange commodities (physical goods)

Foreign Exchange Market

a market in which currencies of different countries are bought and sold

Functions of Financial Markets

Risk management, liquidity, start up capital

Challenges of Markets

Technology (AI), Crypto, Algorithmic trading

what is a security

claim on the cash flow of a company

Price of a security is where

supply = demand

Negative news causes stock price to

Drop

SEC responsibilities

license market professionals, collect public disclosures, enforce laws

Who issues a new security?

Investment bank

What is underwriting?

purchasing securities at a fixed price and putting them on your own balance sheet

What does a broker do?

Acts as an agent to buy/sell stocks & bonds on someone else's behalf

Exchange

a physical location for trading stocks and bonds

Money Market

debt securities that are less than a year

Money market helps with...

transfer of funds (short term needs)

Spot exchange rate

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

Forward exchange rate

the agreed-upon exchange rate between two currencies for a transaction that will take place at a future date

Derivative

a security which the value and payoff is based on another security

Zero coupon Bond

one time maturity payment at the end. Sold at a discount of the face value

Variable rate bond

periodic coupon that is not at a fixed price

Perpetual Bond

coupon bond with no maturity

convertible bond

a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock

callable bond

borrower can pay off bond early at a specified call price

Private Placement

a primary market issue that is negotiated between the issuing corporation and a small group of accredited investors

Initial Public Offering (IPO)

the first time a company issues stock that may be bought by the general public

Aspects of Debt

fixed payments, not owners and no claims on cash flow

Aspects of Equities

ownership, receive left over cash flow

cash flows of equity

share sell and dividends

cash flows of debt

principal and interest

Annuity Present Value Formula

Asset Value / (1+r)^

What has the greatest preference of liquidation

senior debt

How is the coupon rate calculated

annual coupon divided by face value

Synonym for face value

par value

Interest rates and bond prices have what kind of relationship?

inverse relationship

How is yield to maturity calculated

coupon divided by market price

Which has a greater rate risk? 1 year vs. 10 year bond

10 year bond

Bond Indenture

Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations.

Bonds are issues in ___________ form

registered

seniority clause of an indenture

you have priority to be repaid before other lenders

repayment provision

Bonds are repaid at maturity and receive face value.

call provision

an agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity

three large bond rating agencies

Standard & Poors, Moody and Fitch

What's the best bond rating

Triple A

Anything below what bond grade isn't worth investing in

Triple B

U.S. treasury securities are exempt from __________ taxes

state

U.S. treasury securities have _________ default risk

little to no

Municipal bonds are exempt from __________ taxes

federal

The bond yield curve is normal when...

long term rates are greater than short term rates

The bond yield curve is sloping downwards (inverted) when...

short term rates are greater than long term rates

liquidity premium

the portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity

protected covenants

part of the indenture or loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan.

Straight voting stock

votes can only be casted for each director position open

Cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors