Intro to FINC Final Flashcards
What is an indenture?
A contract between the issuing firm and lenders (outlines the terms and conditions of the debt issue)
What is a trustee?
The bondholders representative in a public debt offering. They are responsible for monitoring the borrowers compliance with the terms of the indenture
What is a call feature
A provision to retire bond obligations before maturity.
What is the sinking fund?
This fund is used to ensure debt payments can be met at maturity.
What is the conversion feature?
Allows the holder to exchange the bond for common stock shares at the option of the holder
What is coupon rate?
The annual entered rate paid to bondholders, expressed as a % of par value
What is the cumulative feature?
If a firm can’t pay preferred stock holders its not allowed to pay common stock holders until it has satisfied all.
What is participation?
A preferred issue in which the holders share in any increased earning of the company. (most preferred stock is non-participating)
What is the call feature (preferred stock)?
allows a company to retire its preferred stock at a higher price to the stock holder.
What is the main difference between book value and market value?
Book value - what you paid for it
Market value - how much its worth today in the market.
Whats the relationship between CR and RRR that would deem a bond sell at a Discount?
A bond will sell at a discount if RRR is greater than CR
Whats the relationship between CR and RRR that would deem a bond sell at Par Value?
A bond will sell at par value if the RRR is equal to the CR
Whats the relationship between CR and RRR that would deem a bond sell at a Premium?
A bond will see at a premium if the RRR is less than the CR
What is YTM?
is the rate of return expected to be earned if a bond is purchased at a given price and held until maturity. (takes in to account account gains and losses)
What is the coupon or current yield?
The annual interest payment divided by the current price. (only takes in to account capital gains)
When is a bonds current yield = to its YTM?
When the current price of the bond is = to par (Face value) e.g. not gains or losses
How are preferred stock similar to long term debt?
Interest on long term debt and preferred stock usually remain consistent over time. (The are both fixed income securities)
How is preferred stock similar to common stock?
They are both apart of stockholders equity. They both receive dividends rather than interest.
Why is a sinking fund beneficial for bond holders?
Sinking fund is used to reduce the amount owed at maturity. It reduces the risk that the borrowed will default. It adds liquidity, the bond holder is more likely to get paid back.
What is Interest rate risk?
IRR represent the variation in the market price of a bond hence its realised rate or return. due to change in prevailing interest rates.
What is reinvestment risk?
The potential decrease in interest income that results when a bond issue matures (or called) and, because of a possible decline in interest rates, the investor has to reinvest at a lower coupon rate.
What are Junk Bonds?
Projects that are funded entirely from debt (Bonds) they pay a high return
How to determine the price of a bond
Price of bond = PV(coupons) +PV(Face value)
advantages of equity in capital structure
- Flexibility (dividends)
- Reduces financial leverage
Disadvantages of equity in capital structure
- Dilution of EPS
- More expensive than debt or preferred stock
What are some attributes of common stock?
- Variable income security (holders gain and loose based on the firms earnings)
- Residual ownership
- Permanent long term financing
What are some dividend rights
- You have the right to profit in the performance of the company
- investors will prefer reinvestment, especially when a company is young this improves overall shareholder wealth
What are pre-emptive rights?
- when you are the majority stockholder.
- During a seasoned offering, what ever owner ship you have you can by the same amount of what you currently own. Prevents people increasing their total ownership.
what is a stock split?
Taking a stock that has a value too high. They get divided by a fraction
What is a reverse split?
When a stock price gets too low they combine shares together
What is private placement?
Selling your new shares to a select group of investors - puts the business at risk of a take over. However it saves you time and money.
What is underwriting?
- a couple institutions purchasing all shares at a discount then selling them to the market for a profit. e.g. Facebook
What is Cost of capital?
the average a business pays for every dollar it spends.
Project Classifications?
Independent -
Mutually exclusive
Contingent - rely on another project e.g. a secondary project only if the first project occurs
What is Capital Rationing?
- our capital is limited (choosing the best projects first)
- employee capital
