session 3

Question 1

what is debt capital

Answer 1

• Borrowed money.
• The borrower is obliged to pay interest, at
  a specified annual rate, on the full amount
  borrowed, as well as to repay the principal
  amount at the debt’s maturity

Question 2

what is equity capital

Answer 2

• An ownership usually in the form of
  common or preferred stock.
• Common stockholders receive returns
  on their investments only after
  creditors and preferred stockholders
  are paid in full

Question 2

what is common stock

Answer 2

ownership in a company,
Those who hold the stock
hope to earn dividends
from their share of
company profits.

companies don’t pay
dividends

However, many profitable
companies don’t pay
dividends

– Has voting rights
* Board of directors
* M&A….

Question 3

what is prefered stock

Answer 3

preferred stock is sold by
companies and is then
traded among investors
on the secondary market

companies don’t pay
dividends

– No voting rights
* Receives a fixed dividend

Question 6

advantage of STOCK, SHARE, EQUITY

Answer 6

• No Repayment
• No Legal Obligation
• Does Not Create Debt

Question 7

disadvantage of STOCK, SHARE, EQUITY

Answer 7

• Voting Rights
• Dividends not Tax-Deductible
• Management Works to Keep
  Stockholders Happy

Question 8

Initial Public Offering definition

Answer 8

when a company first sells their shares
to the public (before this they are privately owned firms).
In an IPO it is usually existing (private) shareholders who sell their
shares so the money raised goes to them not the firm, but some
new shares might also be created so the firm can receive funding
to finance projects.

Question 9

Seasoned Equity Offering definition

Answer 9

when a company that has already
sold its shares to the public, sells more shares to raise additional
finance. In an SEO it is the firm itself which sells new shares which
have been created, so all funds raised go to the firm

Question 10

benefit of investors buying equity

Answer 10

bought ownership in the firm,
they are entitled to share in the profits and assets of the
firm. Firms usually pay a proportion of annual profits to
investors in the form of an annual dividend cheque.

can profit from a rise
in the share price and thus sell their shares to other
investors for a profit. The risk, of course, is that the share
price might also fall, resulting in losses.

Question 11

what is bond

Answer 11

bond are long-term debt capital raised by a company for which interest
is paid, usually half yearly and at a fixed rate. The capital is repaid at the
end.

Question 12

what is the coupon rate

Answer 12

the interest payment. E.g. 4.5% interest paid by a company on a
€1,000 bond is the coupon rate (equal to €45 per year).

Question 13

different type of bond

Answer 13

-Floating rate
-Zero coupon
-Deep discount
-Convertible

Question 14

floatting rate bond

Answer 14

• Distinguished from fixed-rate bonds in that the coupon rate is
  adjustable.
• Normally tied to changes in a benchmark bond / t-bill – e.g. German
  five-year government bond rate (but with a lag to rate adjustment)
• Usually contain a put provision whereby holder can sell back bonds at
  par after a certain time
• Maximum and minimum to how much the coupon rate can change
  (capped

Question 15

ZERO COUPON / DEEP
DISCOUNT BONDS

Answer 15

• Pay no coupon rate
• Zero coupon bonds are usually for very short periods of lending
• Sold at a discount to redeemable value, so the return to the holder is
  that the price rises to par as approaches redemption date
• Because of how inputted interest is calculated, can have some tax
  advantages due to favourable tax treatment in earlier years for
  companies, but this is in process of changing

Deep discount bond is the name used for a long-term
zero-coupon bond