Finance 2.0 Flashcards
Sole Proprietorship
A business owned and managed by a single individual.
Owner has unlimited liability for debts.
Partnership
A business owned by two or more individuals.
General partnerships involve shared management and liability
Corporation
A legal entity separate from its owners.
Limited liability for shareholders.
Can raise capital through stock
Primary Market
Market where new securities are issued and sold for the first time.
Corporations raise funds by selling new stock or bonds.
Secondary Market
Market where previously issued securities are traded among investors.
Provides liquidity and market value assessment.
Two Forms of Capital
Debt: Borrowed money that must be repaid, typically with interest (e.g., bonds).
Equity: Funds raised by issuing shares of stock; represents ownership in the company.
Cash Flows
Inflows and outflows of cash representing the operating activities of an organization.
perpetuity
An annuity that continues forever.
PV of Perpetuity:
ππ=πππ/π
β
Effective Annual Rate (EAR)
The actual annual rate earned or paid, accounting for compounding.
Annual Percentage Rate (APR)
The nominal interest rate multiplied by the number of periods per year.
Treasury Bills
Short-term government securities with maturities of one year or less.
Loan Amortization Schedule
A table detailing each periodic payment on a loan, showing amounts toward interest, principal, and the remaining balance
Bond Pricing (discount vs premium)
Discount Bonds: Sold below face value.
Premium Bonds: Sold above face value
Coupon Payments
Regular interest payments made to bondholders.
Often semiannual
Secured vs. Unsecured Bonds
Secured Bonds: Backed by specific assets.
Unsecured Bonds: Backed only by the issuerβs creditworthiness.
Seniority
Senior Bonds: Have priority in claims over junior bonds.
Subordinate Bonds: Have lower priority
Bond ratings
Assessments of creditworthiness by agencies like Moodyβs or S&P.
Government Bonds
Municipal Securities: Issued by local governments.
Treasury Bonds: Issued by the federal government.
Zero Coupon Bonds
Bonds that do not pay periodic interest and are sold at a deep discount.
Convertible Bonds
Can be converted into a predetermined number of common stock shares.
Put Bonds
Allow the holder to force the issuer to repurchase the bond at specified times.
Cash flow of stock
Dividends: Periodic cash payments to shareholders.
Selling: Generating capital gains from the sale of stock.
Common Stock Features
Voting Rights: Typically one vote per share.
Classes of Stock: Different classes may have different voting rights.
Preemptive Right
The right to purchase new shares to maintain ownership percentage.
Preferred Stock Features
Priority over common stock in dividends and asset liquidation.
Dividends are typically fixed and not tax-deductible
Project Types
Mutually Exclusive: Only one project can be chosen.
Independent: Projects that do not affect each otherβs cash flows.
