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Bus 342 Midterm 2

coupon the stated interest payment made on a bond and paid every year
face value the principal amount of a bond that is repaid at the end of the term
par value the principal amount of a bond that is repaid at the end of the term
coupon rate the annual coupon divided by the fave value of the bond
yield to maturity (YTM) the rate required in the market on a bond...basically calculating the present value of cash flows as an estimate of the bond's current market value
discount bond when a bond sells for less that face (or par) value
premium bond when a bond sells for more than face (or par) value
interest rate risk when interest rates fluctuate and change the worth of the bond: longer time=greater risk, lower coupon rate=greater risk
PAR Bond when a bond sells for the same at the face/par value
Bond types government bonds (Treasury Bills, notes, bonds), municipal bonds (not subject to federal tax), and corporate bonds (payment of interest is cost of business and tax deductible, but unpaid debt is liability)
Bills Notes Bonds maturity up to 1 year maturity about 1 year but up to 10 years maturity greater than 10 years
Bond rating: Standard & Poor's AAA, AA, A, BBB, BB, B, CCC, CC, C,D
Bond rating: Moody's Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, D
Registered bonds the issuer keeps track of who owns the bond
bearer bonds kind of like cash, whoever physically has it, owns it
debenture unsecured (>10 year maturity)
note <10 years and unsecured
bond strictly speaking only secured, but can also be used as a generic term
seniority in case of bankruptcy the $ goes by seniority...some bonds can be labeled senior or junior to make clear who will be paid first
sinking fund money they put away to repay everyone at the end of the bond
call provision feature on some bonds: issuer of bond has option to buy back the bond at a pre-determined time and price
convertible bonds bond issued by a company. buyer has the option to convert bond into stocks before maturity
indenture legal agreement between buyer and seller that details the terms of the bond
zero-coupon bond bond without coupons
fixed rate the coupon amount is fixed
floating rate the rate depends on the market....the cash flows are not all even, they go with the market
bond market most trading takes place over the counter (not in a centralized location like the NY stock exchange), HUGE market, but less active, not much transparency (not centralized so don't know exact volume of trading because all spread out)
bid selling price back to dealer (what you could sell the bond for, back to the dealer)
asked buying price (what you would buy the bond for)
proceed the price you pay for the bond
treasury bills 13,26,52 week maturity and no coupons
treasury notes 1-10 years, pays coupons (1 every half a year)
treasury bonds more than 10 years, pays coupons every half a year
Strips each coupon as well as the principal are all issued separately, regular note/bond that pays coupons but breaks them up so you can sell all parts separately. Coupon parts are called C-strips and the principal part is called P-strips
TIPS Treasury Inflation Protection Securities, get adjustments to cancel out inflation
Eurocurrencies money outside the country that issued it (US dollar in Japan is a Eurodollar) (Japanese Yen in canada is euroyen) (A euro in the US is a euroeuro)
Eurobond bond issued by US firm in US $ but sold to investors in Japan
Foreign bond sold in a country and denoted in the currency of that country, but issuer is form another country
Yankee bond foreign bond sold in US
Samurai bond foreign bond sold in Japan
Bulldog bond foreign bond sold in UK
nominal interest rate interest rates that have NOT been adjusted for inflation
real interest rates interest rates that HAVE been adjusted for inflation
interest rate risk premium the longer the maturity the greater the risk so therefore investors need to be compensated for that extra risk so they get this extra premium
inflation premium depends on what they think the economy is going to do (boom then inflation increase and they pay more for the premium, but if recession then less for the premium)
The 2 components of the required return R dividend yield and capital gains yield (growth rate of the stock prices)
dividend yeild the stock's expected cash dividend divided by its current price
capital gains yield the dividend growth rate, or the rate at which the value of an investment grows
common stock dividends: can increase if co. does well but can go down bankrupt: whatever is left after EVERYONE gets paid goes to them voting: have voting rights, elect board of directors
preferred stock dividends: paid out first, fixed dividend, if co. withholds dividends, they get the back owed payments when they are able to before comm stock is paid dividends bankrupt: gets paid first voting: NO voting
cumulative voting all directors are elected at once, each shareholder has (# of shares she owns)*(# of directors) votes...all these votes can be given to 1 director if they want
straight voting elect on director at a time and get number of votes as you have shares. if have 50% +1 shares, then get to pick who you want every time
proxy voting if own shares then get a form and if sign and send in, the assign voting rights to a person to vote for you
classes of stocks A-shares=for public and have less voting power, B-shares=help keep voting rights for people that started the company and gives them more voting power
preemptive right first shot at new stock issue to maintain proportional ownership if desired
IPO/Primary market Initial public offerings (when a co. first issues stock)
Secondary market almost like used shares...someone has already owned them before you
dealers buy stock, own stock, then sell it
brokers connects buyers and sellers but never owns the stock, just connects these two people
2 Main Stock Markets NYSE (New York Stock Exchange) and Nasdaq
Commission broker execute customer (companies/investors) orders to buy and sell
specialist dealer (buy, own, then sell), market maker in a few stocks
floor broker execute orders for commission brokers
floor traders trade for their own accounts
trading on the NYSE specialist's post (girl in vid), commission broker receives order (guy 1), trade in crowd (guy 2), or trade with specialist (girl)
Created by: mbarnum3