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Final Finance Exam
Terms in this set (37)
Limits liability for common stockholders in most cases.
Voting of Shares
Shareholders own the company and elect the board of directors to hire a management team to run the company. Generally, each share of common stock has one vote. When shareholders give their right to vote to someone else this is said to be a proxy vote.
Where some stock can be super-voting, which is one share may have more than one vote.
Cost of Capital
The higher are stock prices the lower a firm's equity cost of capital, all else equal.
Is the risk of the economy or "system" declining
Is company or industry specific risk
Systematic Risk + Unsystematic Risk
Shareholder's Equity Account
In a firm's balance sheet represents the book value (the balance sheet value) of the equity when it was originally purchased by shareholders (Common Stock and APIC accounts) and the value of earnings when earned from operations.
Firm's Market Capitalization (Market Cap) (Market Value)
Defined as price per share times the number of shares outstanding, represents the value the stock market places on the firm's equity.
Book Value of Equity
Is the value the firm's accountants place on the firm's equity (Total Shareholder's Equity)
Market Capitalization (Cap)
Is the value the market places on firm's equity
Is evidence of debt
Face value or maturity value of the bond.
Most bonds pay...
Total Return of Bonds
Interest + Capital Gains or Losses
The contract of a bond
Market Interest Rate
A communication between a company that has a bond issue outstanding and bondholders to ask for a change in the terms of the indenture
Relationship between bond prices and market interest rates
Two important risks of owing a bond
Interest Rate Risk and Credit Risk
Interest Rate Risk (of a bond)
Risk that a bond's price will change as a result of yield curve movements in the marketplace
Risk that a bond issuer will default on the bond and the investor will not receive the principal or interest in the future
Long-term Fixed Coupon Bonds
Generally better for a company to issue because the interest rate is locked in for a long period of time. Also, the principal amount isn't due until far into the future.
Low or Zero Coupon Bonds
These bonds are more price sensitive to changes in interest rates than higher coupon bonds.
Yield difference between bonds with the same maturity but different credit risk. If credit spreads are widening this is often an indication that the economy is weakening. If credit spreads are narrowing this is often an indication that the economy is strengthening.
Fixed Coupon Rate
The rate of interest as a percentage that is associated with the bond issue. Multiply the fixed coupon rate times the par value of the bond and this gives the dollar value of the coupon.
When is the coupon fixed?
At the time the bond is issued. The coupon is fixed to the yield on similar financial quality and maturity debt securities.
Bonds with asset backing
Bonds with no asset baking
A company issues new bonds to pay off the old bond issue
Gives a company the right to retire the bond prior to the stated maturity date.
A bond that can be converted into common stock. The bond will likely trade like common stock.
Bonds that sell at a price above par value
Bonds that sell at a price below par value
Annual dollar coupon divided by the market price of the bond.
Yield to Maturity
A bond yield calculation that considers the return provided by the coupon as well as the capital gain or loss associated with the bond (assuming that the bond is held until maturity)
Yield to Call
A bond yield calculation that considers the return provided by the coupon as well as the capital gain or loss associated with the bond (assuming that the bond is held until the call date).
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Final learning objectives