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FINAN Exam 2

Exam 2

TermDefinition
Why is time value of money important? Serves as the basis for valuing all assets
Annuities Securities that pay a fixed amount each period
Will the FV of a lump sum be larger or smaller if we compound more often, holding the stated r% constant? Larger! Interest is earned on interest more often
APR Nominal, stated, or quoted rate per year ( annual percentage rate)
PER Periodic rate = APR/m
EAR Effective annual rate (what we actually earn or are charged on an annual basis with the "m" compounding periods
How to find EAR on calculator 2nd, 2 (ICONV)...... go up....... NOM=APR...... go up.....c/y=m..... go up...... EFF=CPT enter
How many weeks are in a year 52
Bond contract under which a borrower agrees to MAKE PAYMENTS of principal and interest on specific dates to the HOLDERS OF THE BOND
Par value the face value of one bond (always 1000 in this class) for FV
Coupon rate The stated rate of INTEREST that is paid to bond holders periodically ( to get the pmt multiply coupon rate by the par value)
Debt Not an ownership interest, creditors do not have voting rights, considered cost of doing business, tax advantaged relative to equity, creditors have legal recourse
equity Ownership interest, have a vote, dividends are not considered a cost of doing business and are not a liability of the firm, An all equity firm can not go bankrupt.
Sinking fund requires companies to set aside money each year for the repayment of principal at the maturity of the bond
Call provisions Allows the issuer of the bond to repay the bond early (outlines the penalties to the issuer if the bonds are repaid early)
Protective covnants States terms that the firm must meet
Created by: sekavecr
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