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

Question 1

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

Answer 1

bond

Question 2

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

Answer 2

face value

Question 3

the interest payments paid to the bondholder

Answer 3

coupon

Question 4

annual interest payment as a percentage of face value

Answer 4

coupon rate

Question 5

the risk in bond prices due to fluctuations in interest rates

Answer 5

interest rate risk

Question 6

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

Answer 6

less

Question 7

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

Answer 7

more

Question 8

annual coupon payments divided by bond price

Answer 8

current yield

Question 9

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

Answer 9

yield to maturity

Question 10

total income per period per dollar invested

Answer 10

rate of return

Question 11

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

Answer 11

yield curve

Question 12

the risk that a bond issuer may default on its bonds

Answer 12

default (or credit) risk

Question 13

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

Answer 13

default premium

Question 14

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

Answer 14

investment grade

Question 15

bond with a rating below Baa or BBB

Answer 15

junk bond

Question 16

ownership shares i a publicly held corporation

Answer 16

common stock

Question 17

first offering of stock to the general public

Answer 17

IPO

Question 18

the corporation sells shares in the firm

Answer 18

primary offering

Question 19

market for the sale of new securities by corporations

Answer 19

primary market

Question 20

market in which previously issued securities are traded among investors

Answer 20

secondary market

Question 21

ratio of stock price to earnings per share

Answer 21

P/E ratio

Question 22

net worth of the firm according to the balance sheet

Answer 22

book value

Question 23

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

Answer 23

liquidation value

Question 24

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

Answer 24

intrinsic value

Question 25

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

Answer 25

dividend discount model

Question 26

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

Answer 26

constant-growth dividend discount model

Question 27

fraction of earnings paid out as dividends

Answer 27

payout ratio

Question 28

fraction of earnings retained by the firm

Answer 28

plowback ratio

Question 29

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

Answer 29

sustainable growth rate

Question 30

net present value of a firm’s future investments

Answer 30

present value of growth opportunities (PVGO)

Question 31

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

Answer 31

market-value balance sheet

Question 32

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

Answer 32

technical analysts

Question 33

security prices change randomly, with no predictable trends or patterns

Answer 33

random walk

Question 34

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

Answer 34

fundamental analysts

Question 35

market in which prices reflect all available information

Answer 35

efficient market

Question 36

measure of the investment performance of the overall market

Answer 36

market index

Question 37

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

Answer 37

dow jones industrial average

Question 38

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

Answer 38

standard & poor’s composite index

Question 39

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

Answer 39

maturity premium

Question 40

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

Answer 40

risk premium

Question 41

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

Answer 41

variance

Question 42

square root of variance. another measure of volatility

Answer 42

standard deviation

Question 43

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

Answer 43

diversification

Question 44

risk factors affecting only that firm. also called diversifiable risk

Answer 44

specific risk

Question 45

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

Answer 45

market risk

Question 46

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

Answer 46

market portfolio

Question 47

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

Answer 47

beta

Question 48

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

Answer 48

market risk premium

Question 49

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

Answer 49

capital asset pricing model (CAPM)

Question 50

relationship between expected return and beta

Answer 50

security market line

Question 51

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

Answer 51

company cost of capital

Question 52

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

Answer 52

project cost of capital

Question 53

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

Answer 53

book value

Question 54

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

Answer 54

liquidation value

Question 55

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.

Answer 55

market value