Midterm

Question 1

bonds

Answer 1

investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate

Question 2

coupon rate

Answer 2

annual rate of interest paid

Question 3

coupon

Answer 3

regular interest payment received by holder per year

Question 4

yield to maturity

Answer 4

expected rate of return based on price of bond

Question 5

zero-coupon bonds

Answer 5

• doesn’t pay interest but sells at deep-discount

- treasury bills are zero-coupon

Question 6

common stock

Answer 6

• represents ownership

- no maturity date and variable periodic income

Question 7

vote (3)

Answer 7

1. standard voting rights (one vote per share)
2. non-voting stock
3. super voting rights (multiple votes per share)

Question 8

authorized shares

Answer 8

maximum number of shares that the company may sell

Question 9

issued shares

Answer 9

number of shares that has already been sold by the company

Question 10

treasury stocks

Answer 10

portion of shares that a company keeps in their own treasury

Question 11

bull market

Answer 11

financial market of a group of securities in which prices are rising or are expected to rise

Question 12

bear market

Answer 12

market condition in which the prices of securities are falling, investors anticipate losses

Question 13

efficient markets

Answer 13

market in which security prices are current and fair to all traders

Question 14

weak form

Answer 14

current prices reflect past prices and trading volume

Question 15

semi-strong form

Answer 15

current prices reflect price and volume information and all available relevant public information

Question 16

strong form

Answer 16

current prices reflect price and volume history of the stock, all publicly available information and even all private information

Question 17

3 sources of financing

Answer 17

1. debt
2. common stock (equity)
3. preferred stock (hybrid equity)

Question 18

WACC

Answer 18

weight average cost of capital; minimum acceptable rate of return that the firm should earn on its investments of average risk

Question 19

retained earnings

Answer 19

cost of re is the opportunity cost for the shareholders not being able to invest the money themselves

Question 20

discounted payback period

Answer 20

calculates the time it takes to recover the initial investment in current or discounted dollars

Question 21

discount rate or hurdle rate

Answer 21

the minimum acceptable rate of return that should be earned on a project given its riskiness

Question 22

profitability index

Answer 22

how many dollars we are getting per dollar invested