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21 terms

Finance 3

STUDY
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interest rate
the compensation paid by the borrower of funds to the lender; from the borrower's point of view, the cost of borrowing funds
required return
the cost of funds obtained by selling an ownership interest; it reflects the funds supplier's level of expected return
liquidity preferences
general preferences of investors for shorter-term securities
real rate of interest
the rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders are indifferent to the term of loans or investments because they no liquidity preference, and where all outcomes are certain
risk free rate
the required return on a risk free asset, typically a 3 month treasury bill
yield to maturity
compound annual rate of return earned on a debt security purchased on a given day and held to maturity
yield curve
a graph of the relationship between the debt's remaining time to maturity and its yield to maturity for debts of equal quality and different maturities
inverted yield curve
a downward-sloping yield curve that indicates generally cheaper long term borrowing costs than short term borrowing costs
normal yield curve
an upward sloping curve that indicates generally cheaper short term borrowing costs than long term borrowing costs
risk premium
the amount by which the interest rate or required return on a security exceeds the risk free rate of interest RF; it varies with specific issuer and issue characteristics
coupon interest rate
the percentage of a bond's par value that will be paid annually, typically in two equal semiannual payments, as interest
bond indenture
a legal document that specifies bot the rights of the bondholders and the duties of the issuing corporation
sinking fund requirement
a restrictive provision often included in a bond indenture, providing for the systematic retirement of bonds prior to their maturity
trustee
a paid individual, corporation, or commercial bank trust department that acts as the third party to a bond indenture and can take specified actions on behalf of the bondholders if the terms of the indenture are violated
conversion feature
a feature of convertible bonds that allows bondholders to change each bond into a stated number of shares of common stock
call price
the stated price at which a bond may be repurchased, by us of a call feature, prior to maturity
call premium
the amount by which a bond's call price exceeds its par value
current yield (equation)
annual payment/'current price or bond (po)
discount
the amount by which a bond sells at a value that is less than its par value
premium
the amount by which a bond sells at a value that greater than its par value
YTM
the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity