Financial Management

Question 1

Seasonal Dating

Answer 1

Procedure for inducing customers to buy early by not requiring payment until selling season begins

Question 2

Financial Management Main Functions

Answer 2

(1) Financing function
(2) Capital budgeting function
(3) Financial management function
(4) Corporate government function
(5) Risk management function

Question 3

Financial Management Financing Function

Answer 3

Raising capital necessary to fund a business

Question 4

Financial Management Capital Budgeting Function

Answer 4

Choosing the best long term projects to which to dedicate firms resources based on projects expected risks and returns

Question 5

Financial Management Function

Answer 5

Managing the business’s internal cash flows and capital structure, minimizing financing costs, and ensuring obligations can be paid when due

Question 6

Financial Management Corporate Governance Function

Answer 6

Making sure managerial behavior is ethical and in the interest of business owners

Question 7

Financial Management Risk Management Function

Answer 7

Identifying and managing the business’s various kinds of risk

Question 8

Cash Conversion Cycle

Answer 8

Measures the number of days when a business pays for inputs to when the business collects cash from the resulting sale of finished goods

Question 9

Prime Rate

Answer 9

Rate each lender charges most credit worthy customers

Question 10

London Interbank Offered Rate (LIBOR)

Answer 10

Common base rate for many business loans abroad and in US - computes rates for many short term maturities and currency

Question 11

Public Debt

Answer 11

Business obligations that may be readily resold to general public in markets that SEC regulates

Question 12

Eurobonds

Answer 12

Bonds denominated in US dollars that are sold abroad

Question 13

Debt Covenants

Answer 13

Restrictions on financial behavior

Question 14

Positive Covenants

Answer 14

Stipulates things a borrower must do

Question 15

Negative Covenants

Answer 15

Stipulate what the borrower may not do

Question 16

Mortgage Bonds

Answer 16

Secured by real estate owned by borrowers

Question 17

Collateral Trust Bonds

Answer 17

Secured by financial assets owned by the borrower

Question 18

Debentures

Answer 18

Unsecured bonds

Question 19

Subordinated Bonds

Answer 19

Unsecured bonds that, in liquidation of business, receive repayments only after all more senior creditors have been paid in full

Question 20

Income Bonds

Answer 20

Make interest payments only if business has earnings in excess of some preset level

Question 21

Term Bonds

Answer 21

Face value repaid on single maturity date

Question 22

Serial Bonds

Answer 22

Fraction of face value is repaid on several dates (installments) through the life of the bond

Question 23

Sinking Funds

Answer 23

Through the life of the bonds borrower sets funds aside to cover the repayment of face value of the bond

Question 24

Convertible Bonds

Answer 24

Bondholder may convert bonds to common stock of company as repayment instead of holding to maturity

Question 25

Redeemable Bonds

Answer 25

Bondholder may demand repayment in advance of normal maturity date should certain events occur

Question 26

Callable Bonds

Answer 26

Borrower may repay bondholders before normal maturity date, as compensation for early redemptions call provisions require borrowers to repay bondholders some premium over face value of bonds

Question 27

Stated Rate

Answer 27

Fixed interest payment calculated from face value of bond

Question 28

Current Yield

Answer 28

Fixed interest payment divided by current selling price of bond

Question 29

If Current Yield is Higher than Stated Rate

Answer 29

Bond trading at a discount

Question 30

If Current Yield os Lowers than Stated Rate

Answer 30

Bond trading at a premium

Question 31

Current Yield Formula

Answer 31

Annual Interest Paid / Bond Market Price