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FINA 3313 > FINA Exam 2. Ch. 6, 7, 11, & 12 > Flashcards

FINA Exam 2. Ch. 6, 7, 11, & 12 Flashcards

1
Q

Security that obligates the issuer to make specified payments to the bondholder

A

bond

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2
Q

payment at the maturity of the bond. Also called principal or par value

A

face value

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3
Q

the interest payments paid to the bondholder

A

coupon

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4
Q

annual interest payment as a percentage of face value

A

coupon rate

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5
Q

the risk in bond prices due to fluctuations in interest rates

A

interest rate risk

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6
Q

when the market interest rate exceeds the coupon rate, do bonds sell for more or less than face value?

A

less

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7
Q

when the market interest rate is below the coupon rate, do bonds sell for more or less than face value?

A

more

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8
Q

annual coupon payments divided by bond price

A

current yield

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9
Q

interest rate for which the present value of the bond’s payments equals the price

A

yield to maturity

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10
Q

total income per period per dollar invested

A

rate of return

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11
Q

plot of relationship between bond yields to maturity and time to maturity

A

yield curve

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12
Q

the risk that a bond issuer may default on its bonds

A

default (or credit) risk

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13
Q

the additional yield on a bond that investors require for bearing credit risk

A

default premium

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14
Q

bonds rated Baa or above by Moody’s or BBB or above by Standard and Poor’s

A

investment grade

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15
Q

bond with a rating below Baa or BBB

A

junk bond

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16
Q

ownership shares i a publicly held corporation

A

common stock

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17
Q

first offering of stock to the general public

A

IPO

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18
Q

the corporation sells shares in the firm

A

primary offering

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19
Q

market for the sale of new securities by corporations

A

primary market

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20
Q

market in which previously issued securities are traded among investors

A

secondary market

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21
Q

ratio of stock price to earnings per share

A

P/E ratio

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22
Q

net worth of the firm according to the balance sheet

A

book value

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23
Q

net proceeds that could be realized by selling the firm’s assets and paying off its creditors

A

liquidation value

24
Q

present value of future cash payoffs from a stock or other security

A

intrinsic value

25
Q

discounted cash-flow model which states that today’s stock price equals the present value of all expected future dividends

A

dividend discount model

26
Q

version of the dividend discount model in which dividends grow at a constant rate

A

constant-growth dividend discount model

27
Q

fraction of earnings paid out as dividends

A

payout ratio

28
Q

fraction of earnings retained by the firm

A

plowback ratio

29
Q

the firm’s growth rate if it plows back a constant fraction of earnings, maintains a constant return on equity, and keeps it debt ratio constant

A

sustainable growth rate

30
Q

net present value of a firm’s future investments

A

present value of growth opportunities (PVGO)

31
Q

balance sheet showing market rather than book values of assets, liabilities, and stockholder’s equity

A

market-value balance sheet

32
Q

investors who attempt to identify undervalued stocks by searching for patterns in past stock prices

A

technical analysts

33
Q

security prices change randomly, with no predictable trends or patterns

A

random walk

34
Q

investors who attempt to find mispriced securities by analyzing fundamental information, such as accounting performance and earnings prospects

A

fundamental analysts

35
Q

market in which prices reflect all available information

A

efficient market

36
Q

measure of the investment performance of the overall market

A

market index

37
Q

index of the investment performance of a portfolio of 30 “blue-chip” stocks

A

dow jones industrial average

38
Q

index of the investment performance of a portfolio of 500 large stocks. also called the S&P 500

A

standard & poor’s composite index

39
Q

extra average return from investing in long versus short-term treasury securities

A

maturity premium

40
Q

expected return in excess of risk-free return as compensation for risk

A

risk premium

41
Q

average value of squared deviation from mean. a measure of volatility.

A

variance

42
Q

square root of variance. another measure of volatility

A

standard deviation

43
Q

strategy designed to reduce risk by spreading the portfolio across many investments

A

diversification

44
Q

risk factors affecting only that firm. also called diversifiable risk

A

specific risk

45
Q

economywide (macroeconomics) sources of risk that affect the overall stock market. also called systematic risk

A

market risk

46
Q

portfolio of all assets in the economy. in practice a broad stock market index is used to represent the market

A

market portfolio

47
Q

sensitivity of a stock’s return to the return on the market portfolio

A

beta

48
Q

risk premium of market portfolio. difference between market return and return on risk-free treasury bills

A

market risk premium

49
Q

theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium

A

capital asset pricing model (CAPM)

50
Q

relationship between expected return and beta

A

security market line

51
Q

expected rate of return demanded by investors in a company, determined by the average risk of the company’s securities

A

company cost of capital

52
Q

minimum acceptable expected rate of return on a project given its risk

A

project cost of capital

53
Q

records what a company has paid for its assets, less a deduction for depreciation. it does not capture the true value of a business

A

book value

54
Q

is what the company could net by selling its assets and repaying its debts. it does not capture the value of a successful going concern

A

liquidation value

55
Q

is the amount that investors are willing to pay for the shares of the firm. this depends on the earning power of today’s assets and the expected profitability of future investments.

A

market value

FINA 3313 (2 decks)

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