Finance Flashcards

Finance 325 test 2

Bonds are issued by which of the following? Corporations, Federal Government or its Agencies, State and Local Governments –> All of these
Which of these statements answers why bonds are known as fixed income securities? Many investors on fixed incomes buy them, Investors know how much they will receive in interest payments, and Investors will not receive their principal when the bond’s term is up –> All of these
Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay? Par or face value
To compensate the bondholders for getting the bond called, the issuer pays which of the following? Call premium
Which of the following is NOT a factor that determines the coupon rate of a company’s bonds? The amount of uncertainty about whether the company will be able to make all the payments, The term of the loan, and The level of interest rates in the overall economy at the time–> All of these are factors that determine the coupon rate of a company’s bonds
Which of the following is a true statement? If interest rates fall, all bonds will enjoy rising values.
These investors earn returns from receiving dividends and from stock price appreciation. Stockholders
As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. Common Stockholders
This will only be executed if the order’s price conditions are met. A limit order
Investors buy stock at the… Quoted ask price
We can estimate a stock’s value by… Discounting the future dividends and future stock price appreciation.
We often use the P/E ratio model with the firm’s growth rate to estimate? A stock’s future price
Value stocks usually have? Low P/E ratios and high growth rates
This is a measure summarizing the overall past performance of an investment. Average return
When people purchase a stock… They do not know what their return is going to be – either short term or in the long run.
This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. Total Risk
This is defined as a combination of investment assets held by an investor. Portfolio
This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. Firm specific risk
This is the portion of total risk that is attributable to overall economic factors. Market risk
This is the term for portfolios with the highest return possible for each risk level Efficient portfolios
This is a measurement of the co-movement between two variables that ranges between -1 and +1. Correlation
The larger the standard deviation… The higher the total risk.
This is the average of the possible returns weighted by the likelihood of those returns occurring. Expected Return
The set of probabilities for all possible occurrences. Probability Distribution
This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. Risk-Free Rate
This is the reward investors require for taking risk. Risk Premium
This is the reward for taking systematic stock market risk. Market Risk Premium
The asset pricing theory based on a beta, a measure of market risk. Capital Asset Pricing Model
A measure of the sensitivity of a stock or portfolio to market risk. Beta
Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. Security Market Line

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