Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
FIN301 Exam 2
| Question | Answer |
|---|---|
| An individual loan that a company uses to borrow money from investors | Bond |
| The company borrowing money with a bond is the _____ and the lending investors are the _____ | Issuer, bondholders |
| A legal contract to define the terms and features of a bond signed between the issuer and bondholder | Bond indenture |
| These are the three main features of any bond | 1. Par value 2. Coupon rate 3. Maturity date |
| The bond's interest payments, linked to the bond's par value and coupon rate | Coupon payments |
| Issuers of bonds typically only pay _____ during the life of the bond and pay back the _____ _____ at the end of the bond's life on the _____ _____ | Interest, par value, maturity date |
| Most bonds make coupon payments on a _____-_____ basis | Semi-annual |
| These are the three main types of bonds issued by companies and governments | 1. Fixed rate bonds 2. Floating rate bonds 3. Zero coupon bonds |
| The most common type of bond, having a finite life that ends on the maturity date, an unchanging coupon rate, and an unchanging par value | Fixed rate bond |
| Companies break down bond issuances into _____ to "ladder the repayment" of their debt | Tronches |
| Bonds with really long maturity dates typically have _____ interest rates compared to bonds with shorter dates | Higher |
| A bond that doesn't pay interest payments, with the only cash flow being the repayment of par value on the bond's maturity date | Zero coupon bond |
| Because zero coupon bonds don't provide any payments, they are typically issued at a _____ (a price _____ than par value) | Discount, lower |
| The risk of the company being unable to make the payments on the bonds they issue | Credit risk (default risk) |
| If a company can't make its bond payments, the bondholders are allowed to _____ _____ _____. However, this takes time, and investors may still get only a _____ of their investment back | Sell company assets, portion |
| A rating given to a company by an independent agency to assess the creditworthiness of the company as a bond issuer | Credit rating |
| An improvement in credit rating: _____ A reduction in credit rating: _____ | Upgrade, downgrade |
| Non-investment grade bonds are more _____, so they have a _____ rate of return | Risky, higher |
| A bond whose coupon rate changes over time, and for which coupon payments are typically paid on a quarterly basis | Floating rate bond |
| These are the two parameters that determine the coupon rate on a fixed rate bond | 1. Time to maturity 2. Credit risk (credit rating) |
| The prevailing interest rate being offered by bonds of other companies with the same credit risk and time to maturity | Yield to maturity |
| Companies with better credit ratings issue _____ _____ bonds, while companies with worse credit ratings issue _____-_____ _____ bonds | Investment grade, non-investment grade |
| Par value of a bond = _____ _____ in the calculator inputs | Future value |
| YTM = _____ in the calculator inputs, although often it is _____ by 2 because of semi-annual compounding | I/Y, divided |
| The market of bonds that can be purchased directly from the issuer | Primary market |
| The market of bonds that can be purchased from bondholders who are trying to sell their existing bonds to other investors before maturity | Secondary market |
| The approach to valuing bonds that estimates the value of a security as the present value of all future cash flows that the investor expects to receive from the security | Discounted cash flow approach |
| The price of the bond can be calculated by _____ the bond's promised payments using an appropriate _____ _____, which is the bond's YTM that reflects the riskiness of the cash flows | Discounting, discount rate |
| When the coupon rate = YTM, _____ = _____ _____ | Price = par value |
| To calculate a single interest payment of a semi-annual bond: _____ / _____ * _____ | Par value / 2 * coupon rate |
| The present value you expect to receive as an investor of the bond | Bond price |
| Bond calculations: _____ _____ determines PMT _____ _____ = FV _____ _____ _____ = N _____ = I/Y _____ = PV | Coupon rate Par value Time to maturity YTM Price |
| A unit equal to 0.01% which practitioners in bond markets use to refer to changes in interest rates | Basis point |
| 100 basis points = __% | 1 |
| The second biggest risk for buyers of fixed-rate bonds and zero-coupon bonds, which refers to the risk associated with decreases in bond prices resulting from increases in YTM | Interest rate risk |
| When YTM decreases after issuance, investors ask for a lower return, so price _____. When YTM increases, price _____ | Increases, decreases |
| A bond with a current price above par value: _____ bond A bond with a current price equal to par value: _____ bond A bond with a current price below par value: _____ bond | Premium Par Discount |
| For premium bonds: _____ > _____ > _____ For discount bonds: _____ > _____ > _____ | Coupon rate > current yield > YTM YTM > current yield > coupon rate |
| _____ is always the actual rate earned by investors for a bond! | YTM |
| Current yield = _____ / _____ | One year of coupon income / Current price |
| YTM is more precise than current yield, since current yield ignores this value | Expected capital gain or loss at maturity |
| Realized return = ((_____ - _____) + _____) / _____ | ((End price - begin price) + coupon interest received) / begin price |
| The effective cost of borrowing for a company is the _____ at which the bonds are issued | YTM |
| The two ways companies can raise money | 1. Borrowing (debt) 2. Selling stock (equity) |
| A large public company needs a lot of money for financing, so when they introduce stocks to be sold for the first time, this is the term for that action | Initial public offering |
| Complete the analogy: YTM for bonds is like _____ _____ for stocks | Required return |
| These are the two ways shareholders expect returns from stocks | 1. Dividends 2. Stock price appreciation (required return) |
| These are the two main types of stocks | 1. Common stock 2. Preferred stock |
| Common stock: Most _____ equity security _____ _____: shareholders can collectively elect the board of directors _____ _____ _____: shareholders may periodically receive dividends, but they are not _____ | Common Voting rights Cash flow rights, guaranteed |
| Order in terms of lowest to highest risk: Bond ___ preferred stock ___ common stock | <, < |
| Preferred stock: No _____ date No _____ rights _____ dividends _____/_____ _____ compared to common stock | Maturity Voting Fixed Cumulative/noncumulative Priority |
| Riskier investments will have a _____ coupon rate. Less risky investments will have a _____ coupon rate | Higher, lower |
| Preferred stocks typically pay dividends on a _____ basis | Quarterly |
| A company's ability to pay dividends depends on its future _____ _____ _____ generation, which in turn depends on _____ _____ | Free cash flow, business performance |
| Because business performance is difficult to forecast, equity valuation is inherently more _____ than bond valuation | Uncertain |
| When missed dividends must be paid retroactively before any common dividends are paid | Cumulative |
| When missed dividends are forfeited | Noncumulative |
| When the company can, at their discretion, buy back a stock at a set price | Callable |
| When the company can, at their discretion, exchange a preferred stock for a set number of common shares | Convertible |
| Preferred stocks are a _____ because they have a fixed dividend forever | Perpetuity |
| Value of a preferred stock = _____ _____ / _____ _____ | Annual dividend / required return |
| The Gordon Growth Model is defined by a _____ _____ | Single G |
| Value of a common stock (gordon growth model) = (_____ (1 + _____ )) / (____ - _____) | (Most recent dividend (1 + growth rate)) / (required return - growth rate) |
| The Gordon Growth Model requires _____ > _____ | R > G |
| Because common stocks have no guaranteed dividends, we must _____ future dividends with the Gordon Growth Model or with multiple G values | Estimate |
| The numerator term of the Gordon Growth Model = _____ | D1 |
| The three steps of the multi-stage dividend discount model | 1. Estimate dividends for each year until the first year of the final stage (Find D1, D2, D3, etc) 2. Calculate the terminal value, representing PV(Dt) of all final-stage dividends (Find Vt) 3. Discount 1 and 2 back to today at the required return |
| The perpetual growth rate of any model shouldn't exceed _____ _____ growth (~_____%), because that would be unrealistic | Real GDP, 3.5 |
| Sustainable growth rate estimates that exceed 4% are appropriate for _____-_____ _____ only | Near-term stages |
| The four common methods to estimating the dividend growth rate used in the dividend discount model | 1. Historical CAGR 2. Sustainable growth rate 3. Analyst estimates 4. Implied growth rate |
| Sustainable growth rate = _____ * _____ | Return on equity * retention ratio |
| A backward looking approach that estimates G in dividends per share over a recent period and assumes dividends will grow at a similar rate in the future (a time value of money problem!) | Compounded annual growth rate (Historical CAGR) |
| Since net income can only go toward dividends and retained earnings... 1 = _____ + _____ | Payout ratio + retention ratio |
| Return on equity = _____ / _____ | Net income / total shareholders' equity |
| A G estimation approach for public companies that uses consensus earnings or dividend growth forecasts from analyst coverage | Analyst estimates |
| A G estimation approach where we rearrange the Gordon Growth Model to solve for the growth rate implied by the current market price and an assumed required return | Implied growth rate |
| A measure that estimates a stock's value by comparing it to similar peer companies | Relative valuation |
| Relative valuation does not use a _____ _____ _____ approach, and is instead based on current company performance | Discounted cash flow |
| Price to earnings ratio = _____ / _____ | Stock price / estimated earnings per share |
| Relative value = _____ * _____ | Estimated earnings per share * peer group median price to earnings ratio |
| Complete the analogy: Current yield for bonds is like _____ _____ for stocks | Dividend yield |
| Dividend yield = _____ / _____ | Annual dividend / current price |
| Expected total return = _____ + _____ | Dividend yield + expected annual price appreciation (like YTM or growth) |
Created by:
Liechtensteiner