interest paid on an investment during the first period is added to the principal.
a series of equal dollar payments made for a specified number of years
an annuity in which the payments occur at the beginning of each period
an annuity with an infinite life
loan that is paid off in equal periodic payments
potential variability in future cash flows
statistical measure of the spread of a probability distribution calculated by squaring the difference between each outcome and its expected value, weighting each value by its probability, summing over all possible outcomes, and taking the square root of this sum.
company unique risk
unsystematic risk: related to an investment return that can be eliminated through diversification
systematic risk: related to an investment return that cannot be eliminated through diversification
holding period returns
the return an investor would receive from holding a security for a designated period of time.
relationship between an investments returns and the markets returns. this is a measure of the investments non-diversifiable risk.
relationship between a portfolios returns and the market returns. measure of the portfolios non-diversifiable risk.
identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio
required rate of return
minimum rate of return required necessary to attract an investor to purchase or hold a security
additional return expected for assuming risk
capital asset pricing model (CAPM)
equation stating that the expected rate of return on a project is a function of the risk-free rate, the investments systematic risk, and the expected risk premium for the market portfolio of all risky securities.
security market line
return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic rick associated with a security
long term (10 year or more) promissory note issued by the borrower promising to pay the owner of the security a predetermined, fixed amount of interest each year.
any unsecured long term debt
a debenture that is subordinate to other debentures in terms of its payments in case of insolvency
bond secured by a lien on real property
bond issued in a country different from the one in which the currency of the bond is denominated
zero coupon bond
bond issued at a substantial discount from its $1000 face value and that pays little or no interest
any bond rated BB or lower
debt security that can be converted into a firms stock at a prespecified price
on the face of the bond the stated amount that the firm is to repay upon the maturity date
coupon interest rate
the interest rate contractually owed on a bond as a percent of its par value
length of time until the bond issuer returns the par value to the bondholder and terminates the bond
provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods
legal agreement between the firm issuing bonds and the bond trustee who represents the bondholders, providing the specific terms of the loan agreement
value of an asset as shown on the firms balance sheet. represents the historical cost of the asset rather than its current market value or replacement cost
dollar sum that could be realized if an asset were sold
value observed in the marketplace
present value of an assets expected future cash flows. this value is the amount the investor considers to be fair value, given the amount, timing and riskiness of future cash flows
yield to maturity
rate of return a bondholder will receive if the bond is held to maturity
the ratio f the bonds annual interest payment to its market price
interest rate risk
variability in a bonds value caused by changing interest rates.
a bond that sells at a discount or below par value
bond that is selling above par value