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FINA > EXAM 1 > Flashcards

EXAM 1 Flashcards

1
Q

3 AREAS OF FINANCE

A
  1. CORPORATE FINANCE 2. INVESTMENTS 3. BANKING/FINANCIAL INSTITUTION
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2
Q

CAPITAL BUDGETING DEFINITION

A

LONG-TERM INVESTMENT PLANNING

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3
Q

CAPITAL BUDGET ANALYSIS DEFINITION

A

DECIDING WHAT ASSETS TO BUY

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4
Q

ASSET PRICING DEFINITION

A

VALUING ASSETS

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5
Q

CURRENT MARKET VALUE DEFINITION

A

WHAT A BUYER WILL CURRENTLY PAY FOR AN ASSET

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6
Q

3 INSTITUTIONS

A
  1. BANKS 2. INSURANCE COMPANIES 3. PENSION FUNDS
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7
Q

3 OLD NAMES FOR CORPORATE FINANCE

A
  1. MANAGERIAL FINANCE 2. FINANCIAL MANAGEMENT 3. BUSINESS FINANCE
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8
Q

3 WAYS ASSET MANAGERS INVEST

A
  1. VENTURE CAPITAL 2. MUTUAL FUNDS 3. REAL ESTATE
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9
Q

9 CAREERS IN FINANCE

A
  1. COMMERCIAL BANKING 2. CORPORATE FINANCE 3. FINANCIAL PLANNING 4. HEDGE FUNDS 5. INSURANCE 6. INVESTMENT BANKING 7. MONEY (ASSET) MANAGEMENT 8. PRIVATE EQUITY 9. REAL ESTATE
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10
Q

CASH MANAGEMENT DEFINITION

A

DAY TO DAY FINANCE OPS

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11
Q

6 INVESTMENT BANKING ROLES

A
  1. COMPANY & INDUSTRY ANALYSIS 2. MERGERS & ACQUISITIONS 3. RAISING CAPITAL VIA CORPORATE OFFERINGS 4. SALES & TRADING 5. PRIVATE CLIENT SERVICES 6. BACK OFFICE SUPPORT
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12
Q

HARVEST DEFINITION

A

CASH/STOCK FROM SALES/IPO

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13
Q

BUYOUT DEFINITION

A

PURCHASE OF MAJORITY SHARES

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14
Q

4 CORPORATE FINANCE ROLES

A
  1. CASH MANAGEMENT 2. TAX STRATEGIES 3. FINANCIAL POLICY IMPLEMENTATION 4. INVESTING & FINANCING
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15
Q

5 FUNCTIONAL AREAS OF BUSINESS

A
  1. MARKETING 2. OPERATIONS 3. ACCOUNTING 4. HUMAN RESOURCES 5. STRATEGIC MANAGEMENT
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16
Q

3 TYPES OF SECURITIES

A
  1. TREASURY SECURITIES 2. CORPORATE BONDS 3. STOCKS
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17
Q

SECURITIES DEFINITION

A

STOCKS/BONDS

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18
Q

SYNDICATE DEFINITION

A

OVERSEES ISSUANCE OF STOCKS/BONDS

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19
Q

2 WAYS SYNDICATES ISSUE BONDS

A
  1. COMPETITIVE SALE 2. NEGOTIATED SALE
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20
Q

2 THINGS COMPOSING SYNDICATES

A
  1. INVESTMENT BANKS 2. OTHER INSTITUTIONAL INVESTORS
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21
Q

2 SECONDARY MARKETS

A
  1. AUCTION MARKET 2. DEALER MARKET
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22
Q

AUCTION MARKET DEFINITION

A

PHYSICAL, DETERMINED BY INVESTORS WILLINGNESS TO PAY

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23
Q

DEALER MARKET DEFINITION

A

MULTIPLE DEALERS, QUOTE PRICES FROM AN INVENTORY

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24
Q

SPECIALIST DEFINITION

A

PROVIDES LIQUIDITY IN SECONDARY FINANCIAL MARKETS

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25
Q

THE SPECIALIST CHARGES WHAT TO WHOM?

A

HIGHER = SELLERS LOWER = BUYER

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26
Q

DIFFERENCE BETWEEN BID & ASK OF STOCK

A

BID-ASK PRICE

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27
Q

2 TYPES OF TRADE ORDERS IN FINANCIAL MARKETS

A
  1. MARKET ORDERS 2. LIMIT ORDERS
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28
Q

MARKET ORDERS DEFINITION

A

USED BY INVESTORS, FIRST COME FIRST SERVED

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29
Q

LIMIT ORDERS DEFINITION

A

USED BY INVESTORS, ONLY IF MARKET PRICE REACHES “LIMIT” PRICE

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30
Q

MARKET ORDERS TO SELL STOCK EXECUTE AT THE CURRENT ___ PRICE

A

BID

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31
Q

MARKET ORDERS TO BUY STOCK EXECUTE AT THE CURRENT ___ PRICE

A

ASK

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32
Q

EARNINGS =

A

NET INCOME

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33
Q

3 ROLES OF PRICES

A
  1. PRICES CONVEY INFORMATION 2. PRICES AFFECT THE DISTRIBUTION OF INCOME 3. PRICES AFFECT INCENTIVES
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34
Q

IN EFFICIENT MARKETS, PRICES ARE PREDICTABLE/NOT PREDICTABLE?

A

NOT PREDICTABLE

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35
Q

SECURITIES RETURNS FORMULA

A

HOW MUCH INVESTOR GETS / HOW MUCH INVESTOR INVESTED

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36
Q

2 SECURITIES RETURNS

A
  1. DOLLAR RETURNS 2. PERCENTAGE RETURNS
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37
Q

INCREASE OR DECREASE IN PRICE OF HELD SECURITY

A

DOLLAR RETURNS DEFINITION

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38
Q

PERCENTAGE RETURNS DEFINITION

A

% INCREASE OR DECREASE IN PRICE OF HELD SECURITY

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39
Q

DOLLAR RETURNS FORMULA

A
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40
Q

PERCENTAGE RETURNS FORMULA

A
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41
Q

COSTS FROM NOT ACTING IN SHAREHOLDER BEST INTERESTS

A

AGENCY COSTS DEFINITION

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42
Q

How much of capital is financed by Debts and Equities is the ___-term, ___ decision of a financial manager?

A

LONG TERM, FINANCING DECISION

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43
Q

3 SUBSPECIALTIES OF FINANCE

A
  1. INSTITUTIONS 2. INVESTMENTS 3. CORPORATE FINANCE
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44
Q

Portfolio decisions consist of 3 THINGS

A
  1. what asset classes to invest in.
  2. which asset to invest in.
  3. how much to invest in each asset.
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45
Q

Market value of a firm is the relevant measure of maximizing shareholder wealth because it ___?

A

reflects cash flows and risk of the firm.

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46
Q

A long-term investing strategy in which the investor contributes a set amount into an investment on a set schedule

A

Dollar-Cost Averaging

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47
Q

An acceptable return for a passive investor

A

Fair Return

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48
Q

CORPORATE FINANCE’S PRIMARY FUNCTION

A

maximizing shareholder or owner wealth for privately held companies

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49
Q

Roth IRA DEFINITION

A

A tax-sheltered retirement plan individuals can use to avoid taxes on portfolio returns

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50
Q

Credit Analysts DEFINITION

A

A commercial bank employee with the responsibility to assess the riskiness of lending to borrowers and determining whether or not loans should be extended to potential bank clients

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51
Q

Market Efficiency DEFINITION

A

The degree to which prices in a market reflect all available information

52
Q

Discount Rate DEFINITION

A

Discount Rate=Risk-Free Rate+Risk Premium

53
Q

Future Value FORMULA

A

Future Value=Present Value×(1+i)^n

54
Q

PRESENT VALUE FORMULA

A

Present Value=FV÷(1+i)^n

55
Q

Future Value of an Annuity FORMULA

A
56
Q

Present Value of an Annuity FORMULA

A
57
Q

Effective Yield FORMULA

A
58
Q

WHAT KIND OF FORMULA IS THIS?

A

PRESENT VALUE

59
Q

Present Value of a Perpetuity FORMULA

A
60
Q

What is the present value of an annual payment of $10,000 that is received in perpetuity if the discount rate is 13%?

A
61
Q

Suppose that an investment product pays an investor $10,000 in perpetuity. If the appropriate discount rate is 12%, what should the price (or present value) of this product be?

A
62
Q

Calculate the present value of the following perpetuity?

$500 discounted at 4% annually

A
63
Q

use BEG/END mode to find present value of a 20-year annuity due of $2,500 given an 8% discount rate?

A

Being an annuity due, the payments are paid at the beginning of each year. (Use Beg. mode)

64
Q

2 STEP PROCESS TO SOLVE If you are going to receive $70,000 for 20 years starting 5 years from now, what is the present value of the cash flows discounted at 12%?

A
65
Q

2 STEP PROCESS TO SOLVE What is today’s value of a $5,000 annual perpetuity starting in 40 years discounted at 8%?

A
66
Q

FV COMPOUND INTEREST FORMULA

A
67
Q

PV SINGLE SUM FORMULA

A
68
Q

3 GENERAL PROBLEM TYPES

A
69
Q
A

UNEVEN CF, PV

70
Q

TVM PROBLEM 1

A

UNEVEN CF, FV

71
Q

TVM PROBLEM 2

A

PERPETUITY, PV

72
Q

TVM PROBLEM 3

A

ANNUITY, DEFERRED, PV

73
Q

PVIFA STANDS FOR

A

PRESENT VALUE OF INTEREST FACTOR FOR ANNUITY

74
Q

TVM PROBLEM 4

A
75
Q

TVM PROBLEM 7

A

SINGLE SUM, FV, COMPOUND QUARTERLY

76
Q
A

PVA

77
Q
A

EFFECTIVE ANNUAL RATE (EAR) (EFFECTIVE YIELD)

78
Q
A
79
Q

EAR STANDS FOR

A

EFFECTIVE ANNUAL RATE (EFFECTIVE YIELD)

80
Q

PMT OF 50.77

A

FVAD

81
Q
A
82
Q

“Sources of firm financing that appear in the debt section of the balance sheet.”

A

“Debt Capital”

83
Q

“An approximation of the current yield that does not incorporate the time value of money. Current Yield = Annual Coupon/Current Market Value.”

A

“Current Yield”

84
Q

“The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.”

A

“Face Value”

85
Q

“A legal contract that governs the relationship between a firm and its bondholders.”

A

“Bond Indenture”

86
Q

“Unsecured bonds that are not backed by collateral and that have a lower claim than normal debentures to the assets of the firm in the event of firm liquidation.”

A

“Subordinated Debentures”

87
Q

“Bonds that pay no coupon payments but often sell at deep discounts.”

A

“Zero-coupon Bonds”

88
Q

“The required rate of return on a bond; also called yield to maturity.”

A

“Promised Yield”

89
Q

“The stated interest rate of a bond; also known as coupon rate.”

A

“Coupon Yield”

90
Q

“Unsecured bonds that are not backed by collateral.”

A

“Debentures”

91
Q

“How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity.”

A

“Cost of Capital”

92
Q

“Bonds issued by local governments that are almost always exempt from federal taxes.”

A

“Municipal Bonds”

93
Q

“A bond covenant that describes things the company pledges itself to do in order to protect bondholders.”

A

“Affirmative Covenants”

94
Q

“A bond covenant that describes things the company pledges itself not to do in order to protect bondholders.”

A

“Negative Covenants”

95
Q

“The required rate of return of a bond; also called promised yield.”

A

“Yield to Maturity (YTM)”

96
Q

“The present value of the stream of expected cash flows discounted at an appropriate required rate of return.”

A

“Intrinsic Value”

97
Q

“The sum of money that a corporation promises to pay at the expiration of a bond; also called face value.”

A

“Par Value”

98
Q

“The stated interest rate of a bond; also known as coupon yield.”

A

“Coupon Rate”

99
Q

“A bond that has specific collateral in the form of real estate holdings or real property.”

A

“Mortgage Bond”

100
Q

“A bond that is payable in a currency not native to the country in which it is issued.”

A

“Eurobond”

101
Q

“Bonds that are issued in a domestic market by a foreign firm but in the domestic currency.”

A

“Foreign Bonds”

102
Q

“Rules set forth in the bond indenture to protect bond investors.”

A

“Covenants”

103
Q

“A measure of the interest rate sensitivity of a bond.”

A

“Duration”

104
Q

“Speculative bonds rated BB or below.”

A

“Junk Bonds”

105
Q

“A debt agreement that obligates a corporation to make certain payments to investors in exchange for money the investor lends to the corporation.”

A

“Bond”

106
Q

“The ability of a bond to be converted into equity securities.”

A

“Convertibility”

107
Q

“A high-quality bond rated BBB or above and considered to be fairly low risk.”

A

“Investment-grade Bond”

108
Q
A
109
Q
A
110
Q
A
111
Q
A
112
Q
A
113
Q

THE VALUE OF ANY ASSET = ___

A

PRESENT VALUE OF THE STREAM OF EXPECTED CF, DISCOUNTED AT REQUIRED RATE OF RETURN

114
Q
A
115
Q
A
116
Q
A
117
Q
A
118
Q

Current Yield = Annual Coupon/Current Market Price of Bond

A

= Annual Coupon/Current Market Price of Bond

119
Q
A
120
Q
A
121
Q
A
122
Q
A
123
Q
A
124
Q

price of this bond

A
125
Q
A

FINA (7 decks)

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