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janae

QuestionAnswer
What are the two cash flow sources from a bond? Coupon payments and face value at maturity
What happens when coupon rate = YTM? Bond sells at par
What happens when coupon rate > YTM? Bond sells at a premium
What happens when coupon rate < YTM? Bond sells at a discount
What is the relationship between interest rates and bond prices? They move in opposite directions
What type of bonds have the lowest yield spreads? Investment-grade bonds (BBB or higher)
What type of bonds have the highest yield spreads? Junk bonds (BB or lower)
Formula for price of zero-coupon bond? PV = FV / (1 + r)^n
What is YTM? The discount rate that makes the bond’s present value equal to its market price
Two sources of return for stockholders? Dividends and capital gains
Which stock type has voting rights? Common stock.
Which stock type has fixed dividends? Preferred stock
Ways a firm can increase dividends? Increase earnings, increase payout rate, increase number of shares repurchased
Major limitation of DDM? Only works reliably for firms with stable dividends and growth
NPV definition? Present value of inflows minus initial investment
NPV decision rule? Accept if NPV > 0
IRR definition? Discount rate that sets NPV = 0
IRR decision rule? Accept if IRR > required return
When can IRR be misleading? Mutually exclusive projects, multiple IRRs, nonconventional cash flows
What is the NPV profile? A graph showing NPV at different discount rates
What is the crossover rate? The discount rate where two projects have the same NPV
What does a positive NPV indicate? The project adds value to the firm
Created by: user-2009679
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