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)
2
Q
True or false
The yield on an illiquid bond will be higher than a liquid bond (all things being equal)
A
True
3
Q
True or false
Preferred dividends are like interest on a bond
A
False
4
Q
True or false
A “nominal” rate has been adjusted for inflation
A
false
5
Q
The Bond Indenture is…
A
A contract between the company and the lenders.
6
Q
A ____ _____ is an agreement giving the corporation the option to repurchase the bond at a specified price before maturity.
A
Call provision
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”)
8
Q
The preemptive right of shareholders is when…
A
existing shareholders have the right to share proportionally in any new stock sold.
9
Q
True or False
Shareholders have a legal right to dividends
A
False
10
Q
True or false
Bond ratings consider coupon rates
A
False
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
12
Q
The current stock price formula for constant growth is
A
P0=D1/(r-g)
13
Q
True or false
Bond = Equity
Stock = Debt
A
False
14
Q
True or false
Preferred shares have a stated liquidating value
A
True
15
Q
True or false
A bond that sells for less than it’s face value is called a discount bond.
A
True
16
Q
The 2 main reasons why stock prices go down are….
A
- Risk increases
- Growth shrinks
17
Q
True or false
A face (or par) value is the market value of the bond at the time of maturity.
A
False
18
Q
Dividends are paid out of (before/after) -tax profits of a corporation.
A
after
19
Q
All other things being equal, the (higher/lower) the coupon rate, the greater the interest rate risk.
A
lower
20
Q
True or false
Common shareholders have the right to assets before Bondholders
A
False
21
Q
A bond with a C rating has a (higher/lower) credit risk than a bond with an A rating.
A
Higher
22
Q
_____ _____ is interest earned on a bond but not yet received.
A
Accrued Interest
23
Q
True or false
All corporations and governments issue bonds of the same far value.
A
False
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
25
True or false
Junk bonds generally have lower return rates than AAA rated bonds
False
26
True or false
Firms have different classes of stock to maintain control
True
27
A P/E ratio that is based on estimated future earnings is known as a ____ P/E ratio.
Forward
28
True or false
The **Canada Plus Call** is a type of call provision
True
29
What is the **Capital Gains Yield?**
The same as **Dividend growth rate** (also knows as the rate at which the value of an investment grows)
30
What is a **Deferred Call**?
Call provision prohibiting the company from redeeming the bond before a certain date.
31
All other things being equal, the **(longer/shorter)** time to maturity, the greater interest rate risk.
Longer
32
What affects the Required Return?
* Default risk premium
* Liquidity premium
* Anything else that affects the cashflow to bondholders
33
A bond's time to maturity will **(increase/decrease)** after it is issued.
decrease
34
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?
$50
This is a "trick" question. The bond's current market price is extraneous information.
35
The difference between A call price that is more than the bond's face value and the bond's face value is called a ____ \_\_\_\_\_
Call Premium
36
True or false
Interest Rate Risk does not affect the market price of bonds.
False
37
In an inflationary environment, the nominal rate of return of an investment will be **(higher/lower)** than the real rate of return.
Higher
38
A bond's value can be determined by adding the ______ and \_\_\_\_\_\_\_
* Bond's Present Value
* Bond's Annuity Present Value
39
\_\_\_\_\_\_ ______ is equity without priority for dividends or in bankruptcy.
Common stock
40
What is an **Inflation Premium?**
The portion of a nominal interest rate that represents compensation for expected future inflation.
41
True or false
Preferred stock does not have preference over common stock in the payment of dividends
False
42
A **Call Provision** is...
Agreement giving the corporation the option to repuchase the bond at a specified price before maturity
43
True or false
Yield is another term for "Yield to Maturity"
True
44
True or false
**Real Rates** are interest rates or rates of return that have been adjusted for inflation
True
45
Dividends are not considered a cost of doing business and therefore are not ___ \_\_\_\_\_\_\_\_
Tax Deductible
46
What does NPVGO stand for?
Net Present Value of Growth Opportunities
47
What is a **Dividend Yield?**
A stock's cash dividend divided by its current price.
Dividend Yield = D1/P0
48
True or false
Generally speaking Bondholders have voting rights
False
49
The annual coupon divided by the face value of a bond is equal to the bond's ___ \_\_\_\_
e.g. $50 coupon/$1000 face value
Coupon Rate
50
What is the **Term Structure of Interest Rates**?
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
True or false
The bond's quoted price plus the accrued interest is called the **clean price**
False
52
Bond coupon rates depend on ___ \_\_\_\_\_
Risk Characteristics
53
True or false
Corporations may become bankrupt because of nonpayment of dividends
False
54
Equity represents ______ interest
Ownership
55
The amount by which the call price exceeds the par value of a bond is called the ____ \_\_\_\_\_
Call Premium
56
What is **preferred stock?**
Stock with dividend prioritiy over common stock, normally with a fixed dividend rate, often without voting rights.
57
What is Yield to Maturity (YTM)?
The market **interest rate** that equates a bond's present value of interest payment and principal repayment with it's price.
58
The 3 special case patterns of dividend growth are...
* Zero growth
* Constant growth
* Non-constant growth
59
\_\_\_\_\_ _____ is a stock that has a divdend priority over common stock, normally with a fixed dividend rate, often without voting rights.
Preferred Stock
60
(Bond owner's) risk from fluctating interest rates (market yields) is called _____ \_\_\_\_\_\_ \_\_\_\_\_
Interest Rate Risk
61
The _____ \_\_\_\_\_ _____ \_\_\_\_\_ is the compensation investorys demand for bearing interest rate risk.
Interest Rate Risk Premium
62
What is the face (or par) value of a bond?
The principal amount of a bond that is repaid at the end of the term.
63
True or false
**Nominal Rates** are interest rates or rates of return that have been adjusted for inflation
False
64
Government Bonds usually have (high/low) credit ratings
High
65
True or false
A bonds Yield to Maturity (ytm) never changes
false
66
**Interest Rate Risk** is...
The risk that arises from flucating interest rates (market yields)
67
What are **dividends?**
Return on capital of the corporation paid by the company to shareholders in either cash or stock.
68
True or False
Bonds are primarily traded Over-the-Counter (OTC)
True
69
What are discount bonds?
Bonds that sell for less than their face value
70
The 2 expected sources of return in the dividend discount model are...
* Dividend Yield
* Growth
71
True or false
Preferred stocks are often considered debt in disguise because preferred stocks carry credit ratings.
True
72
What is a Coupon?
The stated interest payment made on a bond.
73
True or false
Dividends and Dividend growth are the only 2 things that drive share price
False
74
Bond ratings reflect...
The ability of a firm to repay its debt and interest on time.
75
True or false
A dividend is a liability of the corporation
false
76
True or false
A "real" interest rate is adjusted for inflation
True
77
A company is a ___ \_\_\_\_ when it's earnings per share is equal to its dividends per share
Cash Cow
78
\_\_\_\_ ____ can be interpreted as capital gains yield.
Growth rate
79
What is a coupon rate?
The annual coupon divided by the face value of a bond.
80
(Calculator Question)
The Future Value of all bonds is...
$1000 (unless otherwise stated)
81
\_\_\_\_\_ _____ is the most common shape of the term structure.
Upward sloping
82
A ____ fund is a mutual fund that invests in bonds and other debt securities.
bond
83
True or false
A bond that pays $56 a year has a present value of $56.
False
84
A bond that cannot be redeemed by the issuer is ___ \_\_\_\_\_
Call Protected
85
What variables are required to calculate the present value of a bond?
* Time to Maturity (N)
* Market rate or Yield (I/Y)
* Coupon rate (PMT)
* Par value (FV)
86
True or false
Generally, the call price is more than a bond's stated value.
True
87
When preferred dividends are deferred indefinitely, common stock dividends....
must also forego dividends
88
If you own stock, what 2 ways can you receive cash?
* Sell the stock
* Receive dividends
89
What is a **Call Premium**?
The amount by which the call price exceeds the part value of the bond.
90
What other factors besides dividends and dividend growth drive share price?
* industry life cycle
* business cycle
* supply and demand shocks
* liquidation value of the firm
* replacement cost of firm's assets
* investor pyschology
91
An _______ is a written agreement between a corporation (the borrower) and its creditors detailing the terms of the debt issue.
Indenture
92
Shareholders of common stock (usually) have the following rights under the Canadian Business Corporations Act
* 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
Bond prices go up when interest rates go (up/down)
Down
94
What 4 pieces of information are required to determine the value of a bond?
* number of periods remaining until maturity
* the face value
* the coupon
* the market interest rate for similar bonds
95
What is **Arrearage?**
deffered cumulative preferred dividends.
96
What is a deferred call?
A Call provision prohibiting the company from redeeming the bond before a certain date.
97
True or false
The **Canada Plus call** provision makes it unattractive for an issuer to call a bond.
True
98
What information is needed to determin the value of a stock using the zero-growth model?
* Dividend
* Discount rate
99
The highest bond rating is \_\_\_\_\_
AAA
100
What is a **Cumulative preferred dividend?**
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
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
"Coattail"
102
A corporation that raises money through a loan is called a **borrower** or \_\_\_\_\_
Debtor
103
True or false
Preferred stocks are often considered debt in disguise because shareholders do not receive any returns over and above the stated return.
True
104
True or false
**Common stock** is equity without prioirty for divdends or in bankruptcy.
True
105
When interest rates go up bond prices go **(down/up)**
down
106
A bond's **C****lean Price** is...
The bond's quote price only.
| (it does not included accrued interest)
107
If the firm is liquidated, preferred shareholders rank **(behind/ahead)** all creditors but **(behind/ahead)** of common shareholders.
behind... ahead
108
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.
greater than
109
What is a a bond "maturity"?
Specified date at which the principal amount of a bond is paid.
110
111
True or false
discount bonds have a lower yield to maturity (ytm) that its coupon rate.
False
112
True or false
If a bond is **Call Protected** the issuer cannot redeem it.
True
113
The dividend yield of a stock is determined by dividing the expected dividend (D1) by \_\_\_\_\_\_\_
The current price ofthe stock (P0)
114
The amount repaid when a bond matures is the _____ value
Face or par
