Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Advanced Finance > Lecture 11 > Flashcards

Lecture 11 Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 65 flashcards Series 63 flashcards Series 66 flashcards Series 7 Top-off Exam flashcards SIE Exam flashcards CFA flashcards Series 79 Top-Off Exam flashcards
1
Q

Debt finance advantages (3)

A
  • Lower cost than equity finance (lower transaction costs/ rate of return)
  • Debt holders don’t generally have votes
  • Interest is tax deductible
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Debt finance disadvantage (3)

A
  • Committed to repayments and interest can be risky
  • Use of secured assets for borrowing can be onerous constraint on management
  • Covenants may restrict managerial action
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Bonds =

A

Debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Indenture =

A

Contract between issuer and bondholder. Includes coupon rate, maturity date and par value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Face/ par value =

A

Principle repaid at maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Coupon rate =

A

Interest repayment, usually paid semi-annually

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Zero-coupon bonds =

A

No coupon payment, sold at large discount to par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Floating/ variable bond =

A

Pay variable coupon rate depending on short term interest/ inflation rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Bonds are issued by

A

Governments (risk free) / companies (more risky)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Bond Interest rate =

A

Government interest rate for same maturity + Default risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Risk premium of bond depends on

A

Company’s credit rating

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

US Treasury bonds (2)

A
  • Purchased directly from the treasury

- Common denomination = $1000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Quoted price (flat price) doesn’t include

A

Interest that accrues between coupon payment dates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Invoice price =

A

Flat price + accrued interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

If a bond is purchased between coupon payment dates

A

Buyer must pay seller for accrued interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Accrued interest calculation =

A

(Annual coupon payment / 2) x (Days since last coupon payment / Days separating coupon payments)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Corporate bond types (4)

A
  • Callable
  • Convertible
  • Puttable
  • Floating rate
18
Q

Callable bonds =

A

Can be repurchased before maturity date

19
Q

Convertible bonds =

A

Can be exchanged for shares in a firm’s common stock

20
Q

Puttable bonds =

A

Gives bondholder the option to retire/ extend bond

21
Q

Floating rate bond =

A

Adjustable coupon rate

22
Q

Preferred stock > equity and fixed income characteristics (4)

A
  • Dividends are paid in perpetuity
  • Non-payment of dividends does not result in bankruptcy
  • Preferred dividends are paid before common
  • Non tax break (not tax deductible)
23
Q

Foreign bonds =

A

Issued by borrower from different country to where sold

24
Q

Yankee bonds =

A

US

25
Q

Samurai bonds =

A

Japan

26
Q

Bulldog bonds =

A

UK

27
Q

Eurobonds =

A

Bonds which are denominated in one currency but sold in other national markets

28
Q

Eurodollar bonds =

A

Dollar-denominated bonds sold outside the US

29
Q

Inverse floaters =

A

Coupon rate falls when general interest rates rise

30
Q

Double effect for inverse floaters in

A

Present value of money and the level of cash flows

31
Q

Asset-backed bonds =

A

Coupon rate is tied to assets eg Walt Disney - performance of films

32
Q

Catastrophe bonds =

A

Transfer ‘catastrophe risk’ from firm to capital markets, increased coupon rates due to increased risk

33
Q

Indexed bonds =

A

Make payments tied to the general price index/ commodity

34
Q

Price and yields have

A

Inverse relationship

35
Q

Bond price curve is

A

Convex

36
Q

Longer the maturity

A

More sensitive bond’s price is to changes in market interest rates

37
Q

Yield to maturity =

A

Interest rate that makes the present value of a bond’s payment = price

38
Q

Yield to maturity commonly interpreted as

A

The interest rate that measures the average rate of return earned on a bond if bought now and held until maturity (bond’s internal rate of return).

39
Q

Current yield =

A

Annual coupon payment / Bond Price

40
Q

For bonds selling at a premium

A

Coupon rate > Current yield > YTM

Advanced Finance (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions