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Financial Management > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

a bond backed by fixed assets.

A

Mortgage Bond

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2
Q

Bonds generally have a specific maturity date on which the par value must be repaid.

A

MATURITY DATE

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3
Q

long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond

A

BONDS

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4
Q

Three major rating agencies:

A

Moody’s Investors Service (Moody’s)
Standard & Poor’s Corporation (S&P),
Fitch Investors Service

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5
Q

Criteria for bond ratings:

A

Financial Ratios
Qualitative Factors:
Miscellaneous Qualitative Factors

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6
Q

whose interest rate fluctuates with shifts in the general level of interest rates

A

Floating- rate bonds

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7
Q

if the issuer defaults, investors will receive less than the promised return

A

Default Risk

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8
Q

a bond that has interest payments based on an inflation index so as to protect the holder from inflation.

A

Indexed (Purchasing Power) Bond

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9
Q

a bond that has just been issued. Generally sell at prices very close to par

A

New issue

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10
Q

a bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price.

A

Puttable Bond

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11
Q

while some bonds are immediately callable, in most cases, bonds are often not callable until several years (5-10 yrs.) after issue.

A

deferred call

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12
Q

Corporate bonds are traded primarily in the

A

over-the-counter market.

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13
Q

a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
issuer must pay the bondholders an amount greater than the par value if they are called

A

CALL PROVISION

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14
Q

Every bond is covered by a contract, often called an indenture, between the issuer and the bondholders which spells out all the terms related to the bond.

A

Bond Contract Terms.

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15
Q

a bond having a claim on assets only after the senior debt has been paid off in the event of liquidation.

A

Subordinated Debenture

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16
Q

how long the investor plans to hold bonds

A

investment horizon

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17
Q

pays no annual interest but is sold at a discount below par, thus compensating investors in the form of capital appreciation.

A

Zero coupon bonds

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18
Q

rating that signifies a bond presents a relatively low risk of default.
Ex. Triple B-rated bonds and higher

A

Investment grade bonds

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19
Q

key factors in bonds riskiness

A

interest rate risk
reinvestment rate risk
default risk

20
Q

a long-term bond that is not secured by a mortgage on specific property.

A

Debenture

21
Q

the specified number of dollars of interest paid each year.

A

Coupon payment

22
Q

a bond that pays interest only if it is earned.

A

Income Bond

23
Q

routinely reports key developments in the Treasury, corporate, and municipal bond markets
lists the most actively traded investment-grade bonds, high-yield bonds, and convertible bonds.

A

The Wall Street Journal

24
Q

the rate of return earned on a bond if it is held to maturity.
It can also be viewed as the bond’s promised rate of return only when (1) the probability of default is zero and (2) the bond cannot be called

A

Yield to Maturity (YTM)

25
Q

bonds issued by the federal government

A

Treasury bonds/ Government bonds

26
Q

bonds issued by state and local governments

A

Municipal bonds/ Munis

27
Q

is exchangeable at the option of the holder for the issuing firm’s common stock.

A

Convertible Bond

28
Q

the stated face value of a bond
the amount of money the firm borrows and promises to repay on the maturity date.

A

PAR VALUE

29
Q

the rate of return earned on a bond when it is called before its maturity date.

A

Yield to Call (YTC)

30
Q

issued by foreign governments or by foreign corporations.

A

Foreign bonds

31
Q

the stated annual interest rate on a bond.

A

coupon interest rate

32
Q

______ statutes govern reorganization and liquidation

A

fiduciary bankruptcy

33
Q

a bond with provision that gives the issuer the right to retire the debt prior to maturity

A

Callable Bond

34
Q

the issuer can handle the sinking fund requirement in either of two ways:

A
  1. It can call in for redemption, at par value, the required amount of bonds.
  2. The company can buy the required number of bonds on the open market.
35
Q

the risk that a decline in interest rates will lead to a decline in income from a bond portfolio

A

Reinvestment Rate Risk

36
Q

a process where the issue is callable, and the company could sell a new issue of low-yielding securities if and when interest rates drop.

A

Refunding Operation

37
Q

issued bond, also called a seasoned issue. Prices of outstanding bonds can vary widely from par.

A

Outstanding bond

38
Q

bonds that carry a higher risk of default.
Ex. Double b-rated bonds and lower

A

Junk bonds

39
Q

a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year.
requires the issuer to buy back a specified percentage of the issue each year.

A

SINKING FUND PROVISION

40
Q

the risk of a decline in a bond’s price due to an increase in interest rates
this affects bondholders because it leads to a decline in the current value of a bond portfolio

A

Interest Rate Risk

41
Q

whose interest rate is fixed for its entire life

A

Fixed- rate bonds

42
Q

any bond originally offered at a price below its par value.

A

Original Issue Discount (OID) bond

43
Q

Changes in bond ratings:

A

This affects its ability to borrow funds capital and its cost of that capital that is why it is important to understand that ratings do not adjust immediately to changes in credit quality.

44
Q
  • the number of years to maturity at the time a bond is issued.
A

Original maturity-

45
Q

When a business becomes insolvent, two things can occur:

A

-They dissolve the firm through liquidation
-They continue to operate through reorganization (restructuring the debt)

46
Q

bonds issued by corporations

A

Corporate bonds

47
Q

long-term option to buy a stated number of shares of common stock at specified price

A

warrant

Financial Management (5 decks)

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