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Finance Exam 3
Terms in this set (27)
The principal amount of a bond that is repaid at the end of the term; also called the par value
The stated interest rate made on the bond
The annual coupon divided by the face value of a bond
The specified date on which the principal amount of a bond is paid
Yield to maturity
The rate required in the market on a bond
How do you find the value of a bond?
PV = FV/((1+Rate)^N)
A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate
a bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate
Par Value Bond
a bond whose stated interest rate is exactly the same as the market interest rate
Interest Rate Risk
the risk that arises for bond owners from fluctuating interest rates
for a bond, the interest rate at which the present value of the actual cash flows from a bond equals the bond's price
Bond's current yield
its annual coupon payments divided by bond price (annual coupon/current price)
the written agreement between the corporation and the lender detailing the terms of the debt issue
Zero Coupon Bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
A long-term bond that is not secured by a mortgage on specific property.
a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date
Floating coupon bond
Payments move with the market; (Good for investors, not always good for issuer)
What are bond ratings and how do they affect the required return?
a way to measure the creditworthiness of a bond, which corresponds to the cost of borrowing for an issuer. These ratings typically assign a letter grade to bonds that indicates their credit quality.
the price a dealer is willing to pay for a security
the price at which a dealer or other trader will sell a security
What does the normal yield curve on a bond look like?
a yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality.
How do you calculate the dividend yield on a share of stock?
the annual dividend per share divided by the stock's price per share
the most basic form of ownership, including voting rights on major issues, in a company
A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.
markets in which corporations raise funds through new issues of securities
markets in which securities and other financial assets are traded among investors after they have been issued by corporations
The positive difference between the purchase price of a stock and its sale price.
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