Int Finance Chapter 7+9

bond long-term debt instrument
treasury bonds bonds issued by the federal government, sometimes referred to as government bonds
corporate bonds bonds issued by corporations
municipal bonds bonds issued by state and local government and exempt from federal taxes and state taxes if holder is a resident of the state
lower market interest rate on a muni is considerably _________ than on corporate bonds with equivalent risk
foreign bonds bonds issued by foreign governments or by foreign corporations
par value face value of a bond. It is the amount of money a firm borrows and promises to repay on a maturity value
coupon payment the specified number of dollars of interest paid each year
coupon interest rate the state annual interest rate on a bond
fixed-rate bonds bonds whose interest rate is fixed for their entire life
floating-rate bonds bonds whose interest rate fluctuates with shifts in the general level of interest rate
zero coupon bonds bonds that pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation
original issue discount bond any bond originally offered at a price below its par value
maturity date a specified date on which the par value of a bond must be repaid
original maturity number of years to maturity at the time a bond is issued
call provision provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date
call premium the additional sum that is paid by the issuer that pays the bondholder if they are called. Often equivalent to 1 year of interest
deferred call bonds that are not callable until several years of issue (generally 5-10 years)
refunding option when a company sells bonds when interest rates are high, so providing the issue is callable the company could sell a new issue of low-yielding securities if and when interest rates drop, use the proceeds of the new issue to refinance the high-rate issue, and thus reduce its interest expense
sinking fund provision provision in a bond contract that requires the issuer to retire a portion of the bond issue each year
convertible bonds bonds that are exchangeable at the option of the holder for the issuing firm’s common stock
warrants long-term options to buy a stated number of shares of common stock at a specified price
higher nonconvertible bonds have _______ coupon rates than warrants and convertible bonds
putable bonds bonds with a provision that allows investors to sell them back to the company prior to maturity at a prearranged price
income bond bond that pays interest only if it is earned
indexed bond bond that has interest payments based on an inflation index so as to protect the holder from inflation
increase decrease an ______ in the market interest rate causes the price of an outstanding bond to fall, where as a ________ in the rate causes the price of a bond to rise
discount bond a bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate
premium bond bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate
yield to maturity rate of return earned on a bond if it is held to maturity
yield to call rate of return earned on a bond when it is called before its maturity date
new issue a bond that has just been issued
outstanding bond once a bond is issued it is called this
capital gains yield bond’s annual change in price divided by the beginning of year price
price risk risk of a decline in a bond’s price due to an increase in interest rates. It’s higher on bonds that have long maturities than on bonds that will mature in the near future.
reinvestment risk risk that a decline in interest rates will lead to a decline in income from a bond portfolio
investment horizon period of time an investor plans to hold a particular investment
duration weighted average of the time it takes to receive each of the bond’s cash flows.
mortgage bond bond backed by fixed assets. first ___________ _______ are senior in priority to claims of second _______ ________
indenture formal agreement between the issuer and bondholders
debenture a long-term bond that isn’t secured by a mortgage on specific property
subordinate debentures bonds having a claim on assets only after the senior debt has been paid in full in the event of liquidation
investment-grade bonds bonds rated triple-B or higher; many bonds and other institutional investors are permitted by law to hold only these types of bonds
junk bonds high risk, high yield bonds
insolvent when a business doesn’t have enough cash to meet its interest and principal payments, it is called this
proxy document giving one person the authority to act for another typically the power to vote shares of common stock
proxy fight an attempt by a person or group to gain control of a firm by getting its stockholders to grant that person or group the authority to vote its shares to replace the current management
takeovers an action whereby a person or group succeeds in ousting a firm’s management and taking control of the company
preemptive right provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro-rate basis new issues of common stock
classified stock common stock that is given a special designation such as Class A or Class B to meet special needs of the company
founders’ shares stock owed by the firm’s founders that enables them to maintain control over the company without having to own a majority of stock
marginal investor representative investor whose actions reflect the beliefs of those people who are currently trading a stock
expected growth rate the expected rate of growth in dividends per share
required rate of return the minimum rate of return on a common stock that a stockholder considers are acceptable
expected rate of return rate of return on a common stock that a stockholder expects to receive in the future
actual rate of return rate of return on a common stock actually received by stockholders in some past period
dividend yield the expected dividend divided by the current price of a share of stock
capital gains yield the capital gain during a given year divided by the beginning price
constant growth model used to find the value of a constant growth stock
zero growth stock common stock whose future dividends are not expected to grow at all
supernormal growth part of the firm’s life cycle in which it grows much faster than the economy as a whole
horizon date date when the growth rate becomes constant. At this date, it is no longer necessary to forecast the individual dividends
horizon value value at the horizon date of all dividends expected thereafter
corporate valuation model a valuation model used as an alternative to the discounted dividend model to determine a firm’s value, especially one with no history of dividends, or the value of a division of a larger firm
dilution when a current investment in a company lowers in value if a company issues new shares
default A bond issuer is said to be in ________ if it doesn’t pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants
lower issuers are more likely to call an outstanding bond issue when interest rates are ______ than they were when the bonds were issued
senior mortgage bonds these bonds are collateralized securities with first claims in the event of bankruptcy
subordinated debentures these bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates
debentures these bonds are traded in the bond markets based on investors’ belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields
debentures these bonds are not backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company
Subordinated debentures these bonds have a claim on assets only after senior debt has been paid in full
senior mortgage bonds these bonds are backed by real estate holdings and equipment and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets
Debentures These bonds are traded in the bond markets based on investors’ belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields
Subordinated debentures these bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates
Senior mortgage bonds these bonds are backed by real estate holdings and equipment, and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets
liquidation reorganization when a business becomes insolvent, a decision must be made whether to dissolve the firm through __________ or to keep it alive through ____________
fairness the basic doctrine of _______ states that claims must be recognized in the order of their legal and contractual priority
feasibility the primary test of ________ in a reorganization is whether the fixed charges after reorganization can be covered by cash flows

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