Finance 2.0

Question 1

Sole Proprietorship

Answer 1

A business owned and managed by a single individual.
Owner has unlimited liability for debts.

Question 2

Partnership

Answer 2

A business owned by two or more individuals.
General partnerships involve shared management and liability

Question 3

Corporation

Answer 3

A legal entity separate from its owners.
Limited liability for shareholders.
Can raise capital through stock

Question 4

Primary Market

Answer 4

Market where new securities are issued and sold for the first time.
Corporations raise funds by selling new stock or bonds.

Question 5

Secondary Market

Answer 5

Market where previously issued securities are traded among investors.
Provides liquidity and market value assessment.

Question 6

Two Forms of Capital

Answer 6

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.

Question 7

Cash Flows

Answer 7

Inflows and outflows of cash representing the operating activities of an organization.

Question 8

perpetuity

Answer 8

An annuity that continues forever.
PV of Perpetuity:
𝑃𝑉=𝑃𝑀𝑇/𝑟

​

Question 9

Effective Annual Rate (EAR)

Answer 9

The actual annual rate earned or paid, accounting for compounding.

Question 10

Annual Percentage Rate (APR)

Answer 10

The nominal interest rate multiplied by the number of periods per year.

Question 11

Treasury Bills

Answer 11

Short-term government securities with maturities of one year or less.

Question 12

Loan Amortization Schedule

Answer 12

A table detailing each periodic payment on a loan, showing amounts toward interest, principal, and the remaining balance

Question 13

Bond Pricing (discount vs premium)

Answer 13

Discount Bonds: Sold below face value.
Premium Bonds: Sold above face value

Question 14

Coupon Payments

Answer 14

Regular interest payments made to bondholders.
Often semiannual

Question 15

Secured vs. Unsecured Bonds

Answer 15

Secured Bonds: Backed by specific assets.
Unsecured Bonds: Backed only by the issuer’s creditworthiness.

Question 16

Seniority

Answer 16

Senior Bonds: Have priority in claims over junior bonds.
Subordinate Bonds: Have lower priority

Question 17

Bond ratings

Answer 17

Assessments of creditworthiness by agencies like Moody’s or S&P.

Question 18

Government Bonds

Answer 18

Municipal Securities: Issued by local governments.
Treasury Bonds: Issued by the federal government.

Question 19

Zero Coupon Bonds

Answer 19

Bonds that do not pay periodic interest and are sold at a deep discount.

Question 20

Convertible Bonds

Answer 20

Can be converted into a predetermined number of common stock shares.

Question 21

Put Bonds

Answer 21

Allow the holder to force the issuer to repurchase the bond at specified times.

Question 22

Cash flow of stock

Answer 22

Dividends: Periodic cash payments to shareholders.
Selling: Generating capital gains from the sale of stock.

Question 23

Common Stock Features

Answer 23

Voting Rights: Typically one vote per share.
Classes of Stock: Different classes may have different voting rights.

Question 24

Preemptive Right

Answer 24

The right to purchase new shares to maintain ownership percentage.

Question 25

Preferred Stock Features

Answer 25

Priority over common stock in dividends and asset liquidation.
Dividends are typically fixed and not tax-deductible

Question 26

Project Types

Answer 26

Mutually Exclusive: Only one project can be chosen.
Independent: Projects that do not affect each other’s cash flows.