financial assets

Question 1

what is debt ?

Answer 1

Debt is a liability; it represents what firms owe
Individuals or businesses that lend money to a firm are called creditors
E.g. Banks loans, corporate bonds, and mortgages

Question 2

what is equity?

Answer 2

Equity represents all physical and financial assets owned by firm
Firms can raise finance by issuing shares or corporate bonds

Question 3

The Difference Between Debt and Equity as a Source of Finance - ownership rights

Answer 3

debt - There are no ownership rights for creditors

Equity - It involves selling shares in a company where shareholders have ownership rights

Question 4

The Difference Between Debt and Equity as a Source of Finance- risk and return

Answer 4

debt -Money must be repaid to creditors with interest

equity - Shareholders are entitled to a share of the company’s profits in the form of dividends

Question 5

The Difference Between Debt and Equity as a Source of Finance- voting rights

Answer 5

debt - There are no voting rights for creditors

equity - Shareholders often have voting rights in company decisions

Question 6

what is market interest rates ?

Answer 6

Market interest rates (also known as yields) are the cost of borrowing money or the return on savings

Question 7

what are bond prices ?

Answer 7

Bond prices are the amount investors are willing to pay for government bonds
Governments and big companies issue bonds to raise funds for various purposes, like covering a government’s budget deficit or allowing a company to invest in new equipment

Question 8

nominal value

Answer 8

Investors buy bonds at face value, also known as the nominal value, becoming bondholders

Question 9

coupon

Answer 9

A coupon is the guaranteed fixed annual interest payment to the investor
The interest rate is fixed on the duration of the bond

Question 10

maturity

Answer 10

Maturity is the date of expiration of the bond
It is usually more than one year, as a result, this investment is illiquid
At maturity, investors receive the full nominal value of the bond

Question 11

before a bond reaches maturity where can it be resold?

Answer 11

secondary markets
Investors can buy or sell them at prices different from the nominal value

Question 12

why may prices for bonds vary in the secondary market?

Answer 12

Market prices for bonds vary in the secondary market due to market forces

If the interest on bonds is high relative to other returns on investment, demand for bonds increases
The lower the demand for bonds, the lower the market price

Question 13

what is the relationship between long run rate of interest and yield ?

Answer 13

herefore, long-run rate of interest and yields have an inverse relationship with government bonds prices
As interest rates rise, bond prices fall
As interest rates fall, bond prices rise

Question 14

how to calculate yield ( do examples on financial assets section)

Answer 14

yield = annual coupon payment÷current market price