Mod 13

Question 1

American style

Answer 1

Bond that makes coupon payments every 6 months

Question 2

Arrears

Answer 2

Missed dividends a company owes to its preferred stockholders

Question 3

Bond

Answer 3

A long term standardized debt instrument that may trade in secondary markets

Question 4

Bond Issued

Answer 4

The total # of bonds issued

Question 5

Bond Issuer

Answer 5

Borrow on side side of a bond issue

Question 6

Bondholder

Answer 6

Lender on one side of a bond issue

Question 7

Common Stock

Answer 7

Owner equity which has the lowest priority for dividends and in bankruptcy

Question 8

Comparables Valuation

Answer 8

Valuation technique that applies the law of one price by combining the appropriate multiple from a comparable firm with the info specific to the firm we are valuating

Question 9

Cost of preferred

Answer 9

Rate of return investors require to hold a preferred stock issue

Question 10

Cost of equity

Answer 10

Rate of return investors require to hold a common stock issue

Question 11

Coupon payment

Answer 11

Interest only payment received regularly by bondholders

Question 12

Coupon rate

Answer 12

% of the face value paid out annually as interest only

Question 13

Credit risk/default risk

Answer 13

Uncertainty about a bond issuer’s ability to make all its required payments

Question 14

Default

Answer 14

Failure on the part of the bond issuer to fulfill the terms of the indenture
Often by failing to make a coupon payment or pay the face value

Question 15

Discount bond

Answer 15

A bond whose price is less than its face value
Coupon rate is less than the yields on similar bonds

Question 16

Dividends

Answer 16

Payments by a corporation to its shareholders

Question 17

European style

Answer 17

Bond that makes a single coupon payment each year
Amount = coupon rate x face value

Question 18

Face value/par value

Answer 18

Principal amount of a bond rapid at the end of the term

Question 19

Indenture

Answer 19

Written agreement between the bond issuer and bondholders detailing the terms of the debt issue

Question 20

Interest rate risk

Answer 20

Risk that a bond’s price will change in unexpected ways due to unanticipated changes in interest rates

Question 21

Law of 1 price

Answer 21

Idea that similar assets should have similar prices
Deviations from the law of 1 price create profit opportunities for traders
Trades restore law of 1 price

Question 22

Maturity date

Answer 22

Date specified in the indenture on which the issuer pays the principal amount of a bond, paying off the loan

Question 23

Par bond

Answer 23

Bond whose price = face value
Coupon rate = yield of similar bonds

Question 24

Preferred stock

Answer 24

Type of stock with dividend priority over common stock
Fixed dividend rate + no voting rights

Question 25

Premium bond

Answer 25

Price is greater than face value
Coupon rate > yields on similar bonds

Question 26

Price sales ratio

Answer 26

Value of a company’s stock divided by its sales

Question 27

Protective covenants

Answer 27

Part of the indenture either limiting or requiring certain actions by the issuer during the term of the loan to protect the lenders

Question 28

Risk premium

Answer 28

Extra compensation an investor requires to bear risk

Question 29

Sales per share

Answer 29

Total sales / total # of shares outstanding

Question 30

Term structure of interest rates

Answer 30

Relationship between yield to maturity and time to maturity all else equal
As time to maturity increases, so does yield to maturity

Question 31

Time to maturity

Answer 31

of years until the issuer pays off the face value of the bond