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BUSA523 - Corporate Finance > Unit 3: Pricing Stocks and Bonds > Flashcards

Unit 3: Pricing Stocks and Bonds Flashcards

1
Q

A Negative Covenant…

A

limits or prohibits actions that the company may take. (e.g. thou shalt not)

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2
Q

True or false

The yield on an illiquid bond will be higher than a liquid bond (all things being equal)

A

True

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3
Q

True or false

Preferred dividends are like interest on a bond

A

False

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4
Q

True or false

A “nominal” rate has been adjusted for inflation

A

false

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5
Q

The Bond Indenture is…

A

A contract between the company and the lenders.

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6
Q

A ____ _____ is an agreement giving the corporation the option to repurchase the bond at a specified price before maturity.

A

Call provision

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7
Q

A Positive Covenant…

A

specifies actions that company agrees to take or a condition the company must abide by. (e.g. “thou shalt”)

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8
Q

The preemptive right of shareholders is when…

A

existing shareholders have the right to share proportionally in any new stock sold.

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9
Q

True or False

Shareholders have a legal right to dividends

A

False

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10
Q

True or false

Bond ratings consider coupon rates

A

False

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11
Q

The mathematical expression for the price of a stock at time (t) using a benchmark PE ration is….

A

Pt = Benchmark PE ratio * EPS

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12
Q

The current stock price formula for constant growth is

A

P0=D1/(r-g)

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13
Q

True or false

Bond = Equity

Stock = Debt

A

False

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14
Q

True or false

Preferred shares have a stated liquidating value

A

True

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15
Q

True or false

A bond that sells for less than it’s face value is called a discount bond.

A

True

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16
Q

The 2 main reasons why stock prices go down are….

A
  • Risk increases
  • Growth shrinks
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17
Q

True or false

A face (or par) value is the market value of the bond at the time of maturity.

A

False

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18
Q

Dividends are paid out of (before/after) -tax profits of a corporation.

A

after

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19
Q

All other things being equal, the (higher/lower) the coupon rate, the greater the interest rate risk.

A

lower

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20
Q

True or false

Common shareholders have the right to assets before Bondholders

A

False

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21
Q

A bond with a C rating has a (higher/lower) credit risk than a bond with an A rating.

A

Higher

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22
Q

_____ _____ is interest earned on a bond but not yet received.

A

Accrued Interest

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23
Q

True or false

All corporations and governments issue bonds of the same far value.

A

False

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24
Q

The Bond Indenture includes

A
  • The basic terms of the bonds
  • The total amount of bonds issued
  • A dsecription of proper used as security (if applicable)
  • Details of protective covenants
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25
Q

True or false

Junk bonds generally have lower return rates than AAA rated bonds

A

False

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26
Q

True or false

Firms have different classes of stock to maintain control

A

True

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27
Q

A P/E ratio that is based on estimated future earnings is known as a ____ P/E ratio.

A

Forward

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28
Q

True or false

The Canada Plus Call is a type of call provision

A

True

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29
Q

What is the Capital Gains Yield?

A

The same as Dividend growth rate (also knows as the rate at which the value of an investment grows)

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30
Q

What is a Deferred Call?

A

Call provision prohibiting the company from redeeming the bond before a certain date.

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31
Q

All other things being equal, the (longer/shorter) time to maturity, the greater interest rate risk.

A

Longer

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32
Q

What affects the Required Return?

A
  • Default risk premium
  • Liquidity premium
  • Anything else that affects the cashflow to bondholders
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33
Q

A bond’s time to maturity will (increase/decrease) after it is issued.

A

decrease

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34
Q

A bond has a $1000 par value and a 5% coupon rate. The bond’s current market price is $1200. What is the coupon payment?

A

$50

This is a “trick” question. The bond’s current market price is extraneous information.

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35
Q

The difference between A call price that is more than the bond’s face value and the bond’s face value is called a ____ _____

A

Call Premium

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36
Q

True or false

Interest Rate Risk does not affect the market price of bonds.

A

False

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37
Q

In an inflationary environment, the nominal rate of return of an investment will be (higher/lower) than the real rate of return.

A

Higher

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38
Q

A bond’s value can be determined by adding the ______ and _______

A
  • Bond’s Present Value
  • Bond’s Annuity Present Value
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39
Q

______ ______ is equity without priority for dividends or in bankruptcy.

A

Common stock

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40
Q

What is an Inflation Premium?

A

The portion of a nominal interest rate that represents compensation for expected future inflation.

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41
Q

True or false

Preferred stock does not have preference over common stock in the payment of dividends

A

False

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42
Q

A Call Provision is…

A

Agreement giving the corporation the option to repuchase the bond at a specified price before maturity

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43
Q

True or false

Yield is another term for “Yield to Maturity”

A

True

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44
Q

True or false

Real Rates are interest rates or rates of return that have been adjusted for inflation

A

True

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45
Q

Dividends are not considered a cost of doing business and therefore are not ___ ________

A

Tax Deductible

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46
Q

What does NPVGO stand for?

A

Net Present Value of Growth Opportunities

47
Q

What is a Dividend Yield?

A

A stock’s cash dividend divided by its current price.

Dividend Yield = D1/P0

48
Q

True or false

Generally speaking Bondholders have voting rights

49
Q

The annual coupon divided by the face value of a bond is equal to the bond’s ___ ____

e.g. $50 coupon/$1000 face value

A

Coupon Rate

50
Q

What is the Term Structure of Interest Rates?

A

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.

51
Q

True or false

The bond’s quoted price plus the accrued interest is called the clean price

52
Q

Bond coupon rates depend on ___ _____

A

Risk Characteristics

53
Q

True or false

Corporations may become bankrupt because of nonpayment of dividends

54
Q

Equity represents ______ interest

55
Q

The amount by which the call price exceeds the par value of a bond is called the ____ _____

A

Call Premium

56
Q

What is preferred stock?

A

Stock with dividend prioritiy over common stock, normally with a fixed dividend rate, often without voting rights.

57
Q

What is Yield to Maturity (YTM)?

A

The market interest rate that equates a bond’s present value of interest payment and principal repayment with it’s price.

58
Q

The 3 special case patterns of dividend growth are…

A
  • Zero growth
  • Constant growth
  • Non-constant growth
59
Q

_____ _____ is a stock that has a divdend priority over common stock, normally with a fixed dividend rate, often without voting rights.

A

Preferred Stock

60
Q

(Bond owner’s) risk from fluctating interest rates (market yields) is called _____ ______ _____

A

Interest Rate Risk

61
Q

The _____ _____ _____ _____ is the compensation investorys demand for bearing interest rate risk.

A

Interest Rate Risk Premium

62
Q

What is the face (or par) value of a bond?

A

The principal amount of a bond that is repaid at the end of the term.

63
Q

True or false

Nominal Rates are interest rates or rates of return that have been adjusted for inflation

64
Q

Government Bonds usually have (high/low) credit ratings

65
Q

True or false

A bonds Yield to Maturity (ytm) never changes

66
Q

Interest Rate Risk is…

A

The risk that arises from flucating interest rates (market yields)

67
Q

What are dividends?

A

Return on capital of the corporation paid by the company to shareholders in either cash or stock.

68
Q

True or False

Bonds are primarily traded Over-the-Counter (OTC)

69
Q

What are discount bonds?

A

Bonds that sell for less than their face value

70
Q

The 2 expected sources of return in the dividend discount model are…

A
  • Dividend Yield
  • Growth
71
Q

True or false

Preferred stocks are often considered debt in disguise because preferred stocks carry credit ratings.

72
Q

What is a Coupon?

A

The stated interest payment made on a bond.

73
Q

True or false

Dividends and Dividend growth are the only 2 things that drive share price

74
Q

Bond ratings reflect…

A

The ability of a firm to repay its debt and interest on time.

75
Q

True or false

A dividend is a liability of the corporation

76
Q

True or false

A “real” interest rate is adjusted for inflation

77
Q

A company is a ___ ____ when it’s earnings per share is equal to its dividends per share

78
Q

____ ____ can be interpreted as capital gains yield.

A

Growth rate

79
Q

What is a coupon rate?

A

The annual coupon divided by the face value of a bond.

80
Q

(Calculator Question)

The Future Value of all bonds is…

A

$1000 (unless otherwise stated)

81
Q

_____ _____ is the most common shape of the term structure.

A

Upward sloping

82
Q

A ____ fund is a mutual fund that invests in bonds and other debt securities.

83
Q

True or false

A bond that pays $56 a year has a present value of $56.

84
Q

A bond that cannot be redeemed by the issuer is ___ _____

A

Call Protected

85
Q

What variables are required to calculate the present value of a bond?

A
  • Time to Maturity (N)
  • Market rate or Yield (I/Y)
  • Coupon rate (PMT)
  • Par value (FV)
86
Q

True or false

Generally, the call price is more than a bond’s stated value.

87
Q

When preferred dividends are deferred indefinitely, common stock dividends….

A

must also forego dividends

88
Q

If you own stock, what 2 ways can you receive cash?

A
  • Sell the stock
  • Receive dividends
89
Q

What is a Call Premium?

A

The amount by which the call price exceeds the part value of the bond.

90
Q

What other factors besides dividends and dividend growth drive share price?

A
  • industry life cycle
  • business cycle
  • supply and demand shocks
  • liquidation value of the firm
  • replacement cost of firm’s assets
  • investor pyschology
91
Q

An _______ is a written agreement between a corporation (the borrower) and its creditors detailing the terms of the debt issue.

92
Q

Shareholders of common stock (usually) have the following rights under the Canadian Business Corporations Act

A
  • right to share proportionally in dividends paid
  • right to share proportionally in assets remaining after liabilities have been paid in a liquidation
  • right to vote on shareholder matters of great importance, such as a merger, usually done at the annual meeting or a special meeting.
93
Q

Bond prices go up when interest rates go (up/down)

94
Q

What 4 pieces of information are required to determine the value of a bond?

A
  • number of periods remaining until maturity
  • the face value
  • the coupon
  • the market interest rate for similar bonds
95
Q

What is Arrearage?

A

deffered cumulative preferred dividends.

96
Q

What is a deferred call?

A

A Call provision prohibiting the company from redeeming the bond before a certain date.

97
Q

True or false

The Canada Plus call provision makes it unattractive for an issuer to call a bond.

98
Q

What information is needed to determin the value of a stock using the zero-growth model?

A
  • Dividend
  • Discount rate
99
Q

The highest bond rating is _____

100
Q

What is a Cumulative preferred dividend?

A

A dividend that accumulates if it is not paid. e.g. if a firm does not paid the dividend this year it gets cairred forward to the next year (also called arrearage)

101
Q

To protect the non-voting shareholders, most companies have a ______ provision giving non-voting shareholders either

  • the right to vote
  • convert their shares into voting shares that can be tendered to the takeover bid
A

“Coattail”

102
Q

A corporation that raises money through a loan is called a borrower or _____

103
Q

True or false

Preferred stocks are often considered debt in disguise because shareholders do not receive any returns over and above the stated return.

104
Q

True or false

Common stock is equity without prioirty for divdends or in bankruptcy.

105
Q

When interest rates go up bond prices go (down/up)

106
Q

A bond’s Clean Price is…

A

The bond’s quote price only.

(it does not included accrued interest)

107
Q

If the firm is liquidated, preferred shareholders rank (behind/ahead) all creditors but (behind/ahead) of common shareholders.

A

behind… ahead

108
Q

If a bond is selling at a discount from its par value, its yield to maturity (ytm) is (greater than/less than) its coupon rate.

A

greater than

109
Q

What is a a bond “maturity”?

A

Specified date at which the principal amount of a bond is paid.

111
Q

True or false

discount bonds have a lower yield to maturity (ytm) that its coupon rate.

112
Q

True or false

If a bond is Call Protected the issuer cannot redeem it.

113
Q

The dividend yield of a stock is determined by dividing the expected dividend (D1) by _______

A

The current price ofthe stock (P0)

114
Q

The amount repaid when a bond matures is the _____ value

A

Face or par

BUSA523 - Corporate Finance (9 decks)

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