Unit 6 Flashcards
the date at which a bond expires.
Maturity date
the rate of return that investors receive on a bond if they purchase a bond today at the market price and hold it until it matures; the required rate of return given the maturity and risk of the bond.
Yield to Maturity (YTM)
statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders.
Covenants
a bond covenant that describes things the company pledges itself to do in order to protect bondholders.
Affirmative covenants
a bond covenant that describes things the company pledges itself not to do in order to protect bondholders.
Negative covenants
Failure to meet a debt obligation.
Default
a bond whose price Is above its par value
Premium bond
a bond whose price is below its par value.
Discount bond
a bond whose price is exactly equal to its par value.
Par bond
the current market value of a publicly traded company’s total outstanding shares, indicating the size of a company.
Market Capitalization
a type of stock that represents equity in a firm and confers the right to vote at shareholder meetings.
Common Stock
a group of people who jointly supervise the activities of an organization.
Board of directors-
the system of rules, practices, and processes by which a firm is directed and controlled.
Corporate governance
a hybrid security that has no fixed maturity, has fixed payments and does not confer voting right on bondholders.
Preferred stock
a security that has some elements that resemble equity and others that resemble debt.
Hybrid security
a feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to it common stockholders.
Dividend in arrears
the sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.
Capital investment
the value of an asset as determined through fundamental analysis without referring to the asset’s market value.
Intrinsic Value
a formula used to value preferred stock that is based on the calculation of a perpetuity.
Perpetuity model
a formula used to value common stock based on the assumptions that dividends are paid every year and grow at a constant rate forever.
Gordon growth model
a model used to evaluate common stock that calculates the vale of a share of common stock today by taking the present value of future dividend cash flows.
Dividend discount model
a model used to determine the risk-return relationship for an asset.
Capital asset pricing model (CAPM)
the process of evaluating and planning for purchases of long-term assets.
Capital Budgeting
Companies or securities with beta greater than 1.
Aggressive Assets
A variable that describes how the price of a security varies with the market.
Beta
A legal contract that governs the relationship between a firm and its bondholders.
Bond Indenture
A person who loans a corporation money by buying debt securities.
Bondholders
The reduction in sales of a company’s own products due to introduction of another similar product.
Cannibalization
Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment.
Capital Budgeting Criteria
A debt instrument that is issued by a corporation in order to raise capital.
Corporate Bonds
The stated interest rate of a bond; also known as coupon rate.
Coupon Yield
Companies or securities with beta less than 1
Defensive Assets
The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.
Face Value
Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year.
Fixed-income Securities
Cash flows that result from accepting a project
Incremental Cash Flows
The sum on money that a corporation promises to pay at the expiration of a bond; also called face value
Par Value
A cost that has already been incurred and cannot be recovered
Sunk Costs
The unlimited earnings potential of equity ownership
Upside Potential
