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.
government-sponsored enterprise
GSE
A company that is created by a national government
in order to participate in or help support various
commercial activities on the government’s behalf.
green bond
A type of bond used by federally qualified
organizations to raise funds to promote sustainability
by developing underutilized or abandoned
properties.
high-yield bond
A high-paying bond with a lower credit rating than
investment-grade corporate bonds, Treasury bonds,
and municipal bonds.
hybrid security
A type of security that is generally created by
combining the elements of two or more different
types of securities into one.
income bond
A type of bond that pays interest only if a company
has profits, thus reducing some of the risk of issuing
debt from a company’s viewpoint.
index bond
A type of bond that has interest rates tied to an
economic index. Index bonds are used most often
when a high level of price inflation is present or
possible.
initial public offering (IPO)
The first sale of stock by a private company to the
public.
intermediate-term note
A note with a maturity of two to ten years.
investment banker
A professional who is responsible for assisting issuers
in the design and placement of securities issuances.
lead bank/institution
The financial institution that is responsible for
managing a syndicated loan or securities sale that is
funded by multiple financial institutions.
lien
A legal claim on an asset or assets
London Interbank Offered Rate (LIBOR)
An interest rate at which banks can borrow funds,
in marketable size, from other banks in the London
interbank market.
long-term bond
A bond with a maturity of 10 to 30 years.
material adverse change (MAC) clause
A clause in a loan agreement that allows a lender to
refuse funding or declare a borrower to be in default,
even if all agreements are in full compliance, if the
lender believes a material change has occurred to
the detriment of the borrower’s condition.
maturity matching
A practice that involves pairing the life of a debt
issue to the life of the specific assets financed or
the maturity of an investment to the future need for
funds.
mortgage bond
A type of bond used to finance specific assets, such
as real estate, that are pledged as security against
the issue.
multicurrency bond
A type of bond that is usually issued as (1) a currency
option bond that allows investors to choose among
several predetermined currencies, or (2) a currency
cocktail bond that is denominated in a standard
basket of several currencies.
municipal bond (muni)
A sub-sovereign bond issued by a municipality,
typically in the United States and usually in the form
of a general obligation or revenue bond.
off-balance-sheet financing
A type of arrangement designed to provide financing
that does not appear on the balance sheet.
operating lease
A type of lease that is established in such a way that
the lessor may maintain the equipment and retain
ownership thereof at the end of the lease.
origination
An investment bank function that involves
consultation with a company raising funds about
the characteristics of a securities issue and any
underlying documents.
origination desk
A subset of trading professionals who are charged
with evaluating, pricing, and managing the
placement of new security issues.
personal guarantee
A type of guarantee in which a lender may require a
pledge on the part of the owner or other principals in
a business before granting a loan to the business.
pledge
A binding promise in which a borrower offers
collateral to a lender as security, usually in return for
a loan.
political risk
A term applied to a variety of actions that a
government may take that negatively impact a
company’s operations and/or value.
preferred stock
An investment security that is a type of equity,
but is different from common stock in terms of its
stockholder rights and dividend payment streams. In
terms of cash flows, it is more like debt than equity
because of the fixed dividend payments.
primary market
A financial market that offers newly issued debt
and equity securities to investors when firms or
government units sell securities to raise funds.
private market
A financial market for direct placement, in which
securities are offered and sold to a limited number
of investors, and not offered to the general public.
The investment banking firm, acting as a broker to
bring the issuer and investors together, meets with
prospective buyers and confirms the details of the
offering.
put provision
A condition that allows a bondholder to resell a
bond back to the issuer at a preestablished price on
certain stipulated dates prior to maturity.
rating agency/credit rating agency
A company that assigns credit ratings that, in
its opinion, rate a debtor’s (1) ability to pay back
debt by making timely interest payments and (2)
likelihood of default.
representations
Along with warranties, these are the existing
conditions at the time when a loan agreement is
executed, as attested to by the borrower
seasoned equity offering (SEO)
A type of stock offering in which new stock shares
are sold by a company that has shares already
trading on an exchange or in the over-the-counter
market.
secondary market
A financial market that trades previously issued
securities.
securities exchange
An organized stock exchange that facilitates the
buying and selling of debt and equity securities.
securitization
The practice of pooling various debt contracts, such
as consumer loans, credit card debt, and mortgages,
and using them as a basis for issuing securities.
sinking fund
A fund that is the result of a provision that may
be attached to a bond or preferred stock issue. It
generally requires the issuer to set aside this pool
of funds, which can be used to repay the bond’s
principal at maturity
SOFR: Secured Overnight Financing Rate
Published daily by the New York Federal Reserve,
this rate is an indication of the cost of overnight cash
collateralized by US Treasury securities.
SONIA: Sterling Overnight Index Average
Published by the Bank of England, this is seen as a
market replacement for LIBOR for GBP-denominated
transactions.
sovereign bond
A bond issued by a national government and
typically denominated in the currency of the issuing
government.
special drawing right (SDR)
An artificial currency, created by the International
Monetary Fund, whose asset value is based on a
basket of currencies consisting of the euro, Japanese
yen, British pound sterling, and US dollar.
specific-project guarantee
A type of loan guarantee in which the guaranteeing
party guarantees only loans relating to specific
projects of the subsidiary, rather than all loans.
sub-sovereign bond
A type of bond issued by a level of government
below the national or central government,
which includes regions, provinces, states, and
municipalities.
syndicate
A group of banks that work together, typically to
underwrite a securities issue or arrange a loan.
tender option bond
A type of bond that allows the holder to redeem the
bond either once during its life or on specified dates.
term loan
A type of loan with a fixed maturity, usually
greater than one year, that can be repaid either in
installments or in a single payment.
term note
A medium-term debt instrument, typically with terms
from two to ten years, issued by an organization.
In most cases, these notes pay interest at periodic
intervals.
tracking stock
A special type of stock that is a separate stock
created by a parent company to track the financial
progress of a particular line of business.
underwriting
An investment bank function, this is the act of
purchasing all or a part of a block of securities issued
by a company and thereby becoming responsible for
their ultimate distribution.
warranties
Along with representations, these are the existing
conditions at the time when a loan agreement is
executed, as attested to by the borrower.
zero-coupon bond
A debt security that does not pay interest (a
coupon) but is traded at a deep discount, rendering
a profit at maturity when the bond is redeemed for
its full face value.
