Content

Question 1

Bond

Answer 1

interest only loan - a form of debt

Question 2

coupon

Answer 2

initial amount

Question 3

face/ par value

Answer 3

principal amount paid when bond matures

Question 4

maturity

Answer 4

refers to the final payment of a loan

Question 5

yield to maturity

Answer 5

going rate on the market for bonds of similar risk

Question 6

Discount rate

Answer 6

used to value a bond

Question 7

discount bond

Answer 7

a bond that is trading for less than par value

Question 8

premium bond

Answer 8

a bond that is trading above par value

Question 9

interest rate risk

Answer 9

risk that investments value will change due to a change in the absolute level of interest rates

Question 10

reinvestment rate risk

Answer 10

chance an investor will not be able to reinvest cash flows from an investment at a rate equal to the investments current rate of return

Question 11

realized yield

Answer 11

calculated when you sell a bond before its maturity date

Question 12

bonds current yield

Answer 12

annual coupon / price

Question 13

indenture

Answer 13

document outlining the basic terms of bonds

Question 14

zero coupon bonds

Answer 14

bonds that do not offer any interest. Sell at a discount (Ex. T bills and T bonds)

Question 15

debenture

Answer 15

bonds that have no security provisions

Question 16

call provision

Answer 16

corporation can require you to sell back the bond at a call price

Question 17

deferred call

Answer 17

not allowed to exercise call provision

Question 18

floating coupon bond

Answer 18

coupon rates float according to some index, less interest rate risk

Question 19

municipal bonds

Answer 19

are usually exempt from federal income tax

Question 20

federal bonds

Answer 20

exempt from state and local tax but may be taxed at the federal level

Question 21

bid price

Answer 21

price that a dealer or broker is prepared to pay for

Question 22

ask price

Answer 22

lowest price a seller is willing to sell at

Question 23

the norm yield curve on a bond

Answer 23

an upward sloping yield curve, in which short term devt instruments have a lower yield than long term debt instrument of the same credit quality

Question 24

dividend yield of common stock

Answer 24

annual dividend / current stock price

Question 25

common stock vs preferred

Answer 25

both represent ownership

common: typically has voting rights
preferred: stockholders received a fixed dividend from the company

Question 26

Primary vs. Secondary Market

Answer 26

primary: invests by securities directly from the company issuing them (IPO)
Secondary: investors trade securities, anything after the IPO

Question 27

how to find expected return

Answer 27

R=D1/P0 + G, dividend yield, capital gains yield

Question 28

capital gains, what does it equal with the constant growth model

Answer 28

increase value of a capital asset that gives it a higher worth. Equal to total return when no cash flow is generatead