Part II Chapter 6 Flashcards
additional paid-in capital (APIC)
An equity account that reflects the difference at the
time of issue between the par value and the issuance
price (less underwriting costs) of any new stock sold
by a company.
bond
A debt investment in which an investor loans money
to an entity (corporate or governmental) that
borrows the funds for a defined period of time, at a
fixed or variable interest rate.
bond indenture
A legal document that outlines the rights and
obligations of the borrower and lender. It is a
contract between the company and the debt holders,
which includes various restrictive covenants that
impose constraints on the actions of the company’s
management.
book value per share
Total common stockholders’ equity divided by the
number of shares outstanding.
call premium
Compensation to investors for early redemption of a
debt instrument.
call provision
A provision that gives the issuing entity the right
to call in a debt issue for redemption prior to the
original maturity.
capital investment
Funds used by a business to purchase long-term,
typically fixed assets, such as land, machinery, or
buildings.
capital markets
A structure in which individuals and institutions trade
financial securities with maturities in excess of one
year. Organizations/institutions in the public and
private sectors also often sell long-term (debt and/or
equity) securities on the capital markets in order to
raise funds.
collateral
Assets used as security for a loan or bond issue. They
may include physical assets (e.g., plant, equipment,
and inventory) or financial assets (e.g., receivables
and marketable securities).
collateral trust bond
A type of financial instrument backed by securities of
other companies that are owned by the firm issuing
the bond.
comfort letter
A letter from another party stating actions that it will
or will not take on behalf of the borrower. This type
of agreement is not legally enforceable.
common stock
A security that represents ownership in a company
convertible bond
A type of corporate debt security that can be
converted by the holder, or sometimes the issuer,
into shares of common or preferred stock at a fixed
ratio.
cost of capital
A measure of the cost a company would incur to
raise funds to make investments in assets.
covenant
An additional requirement that is placed on debt
or bond issues and that imposes constraints on the
actions of the company’s management.
credit enhancement
An addition to a borrowing arrangement or debt
securities issue meant to improve the overall credit
rating on the loan or issue. It generally provides
either a guarantee of payment in the event of default
or an agreement to provide financing to roll over the
debt issue.
crowdfunding
A private financing technique used, typically by
start-up or smaller companies, to access equity
finance. The process usually involves a relatively large
number of investors who each pledges a relatively
small amount of funding.
cure period
A period of time, often specified in a loan agreement,
in which an event of default may be corrected before
the lender may pursue default remedies.
custodian
A third party that typically takes possession of
securities, receives delivery or book entry of principal
and interest payments, performs record keeping, and
provides maintenance services for an investment
portfolio.
debentures
Unsecured bonds that represent general claims
against the issuer organization’s assets and/or cash
flows, and may carry a higher interest cost (to the
issuer) than secured bonds.
debt indenture
The contract between the issuing entity of a bond
and the bondholders.
debt market
A financial market in which participants can issue
new debt, or buy and sell debt securities.
defeasance of debt
A financial management method that removes debt from an organization’s balance sheet without actually retiring the debt issue. In this arrangement, the borrower places sufficient funds in escrow, usually in government securities, to pay for interest and principal on the debt issue. Because control of both the debt and escrow funds is relinquished, and payment and retirement of the debt issue is now guaranteed, this debt and the related securities can be removed from the balance sheet and do not need to be considered in relation to any restrictive covenants the organization may have regarding debt.
depositary receipt (DR)
A type of negotiable financial instrument (typically
equity securities) that trades on a local exchange
but actually represents stock ownership in a foreign,
publicly listed company.
economic development bond
A type of bond typically issued by a developing
country or sponsoring organization, such as the
World Bank or the International Monetary Fund, for
the express purpose of fostering development of
infrastructure and related projects.
equipment trust certificate
A type of bond that is secured by movable
equipment (e.g., an aircraft, a fleet of trucks, or
railroad equipment).
equity market
A market where shares are issued and traded.
equity securities
Stock (shares) that represents the ownership of
publicly owned corporations
Eurobond
A type of bond sold simultaneously in many
countries outside the country of the borrower and
denominated in a currency other than that of the
country in which it is issued.
event of default
An action or circumstance by which a borrower
breaches or violates any term or condition under a
debt agreement.
floating-rate debt
A type of debt issue that carries interest payments
that reset periodically based on movement in a
representative interest rate index.
foreign bond
A type of bond sold in a particular country by a
foreign borrower, but usually denominated in the
domestic currency of the country where issued.
full guarantee
A level of guarantee for a subsidiary in which the
guaranteeing party (the parent organization or
another party) fully guarantees any borrowing
arrangement by the subsidiary and agrees to take
over the loan if the subsidiary fails to make timely
payments.
