Principles of Finance - Test 3 Study Guide

Vocabulary flashcards covering core definitions, formulas, and concepts from Chapters 7, 8, and 9 for Test 3 in Principles of Finance.

Sensitivity Analysis

What-if scenarios that change inputs (such as revenue, sales price, and units) to calculate $NPV$.

Accounting Breakeven

The breakeven level at which net income equals zero ($\text{Net Inc} = 0$).

Financial Breakeven

The breakeven level at which net present value equals zero ($NPV = 0$).

Coupon Rate

The rate used to calculate interest payments on a bond.

Par Bond

A bond pricing condition where the coupon rate equals the market rate ($\text{CR} = \text{MR}$) and par value equals present value ($\text{PAR} = \text{PV}$).

Premium Bond

A bond pricing condition where the coupon rate is greater than the market rate ($\text{CR} > \text{MR}$) and par value is less than present value ($\text{PAR} < \text{PV}$).

Discount Bond

A bond pricing condition where the coupon rate is less than the market rate ($\text{CR} < \text{MR}$) and par value is greater than present value ($\text{PAR} > \text{PV}$).

Interest Rate Risk: Time to Maturity

The interest rate risk dynamic where a longer bond maturity results in higher risk.

Interest Rate Risk: Coupon Rate

The interest rate risk dynamic where a lower coupon rate results in higher risk.

Municipal Bonds

Governmental bonds that are tax-exempt for federal purposes.

Bid Price

The price a dealer is willing to pay.

Ask Price

The price a dealer is willing to sell.

Spread

The difference between the bid and ask price.

Constant Growth Dividend

A dividend stream that grows at the same rate forever (perpetuity).

Growth Rate ($g$)

The dividend growth rate calculated as retention rate multiplied by return on equity ($\text{Ret Rate} \times \text{ROE}$ ).

Enterprise Value

Market value of equity plus market value of debt minus cash ($\text{Market Value of Equity} + \text{MV of Debt} - \text{Cash}$ ).

Primary Market

The stock market venue where stock is initially sold.

Secondary Market

The stock market venue for investor-to-investor trading.