Unit 6

Question 1

the date at which a bond expires.

Answer 1

Maturity date

Question 2

the rate of return that investors receive on a bond if they purchase a bond today at the market price and hold it until it matures; the required rate of return given the maturity and risk of the bond.

Answer 2

Yield to Maturity (YTM)

Question 3

statements in a bond indenture that outline things the company will obligate itself to do or not do in order to protect bondholders.

Answer 3

Covenants

Question 4

a bond covenant that describes things the company pledges itself to do in order to protect bondholders.

Answer 4

Affirmative covenants

Question 5

a bond covenant that describes things the company pledges itself not to do in order to protect bondholders.

Answer 5

Negative covenants

Question 6

Failure to meet a debt obligation.

Answer 6

Default

Question 7

a bond whose price Is above its par value

Answer 7

Premium bond

Question 8

a bond whose price is below its par value.

Answer 8

Discount bond

Question 9

a bond whose price is exactly equal to its par value.

Answer 9

Par bond

Question 10

the current market value of a publicly traded company’s total outstanding shares, indicating the size of a company.

Answer 10

Market Capitalization

Question 11

a type of stock that represents equity in a firm and confers the right to vote at shareholder meetings.

Answer 11

Common Stock

Question 12

a group of people who jointly supervise the activities of an organization.

Answer 12

 Board of directors-

Question 13

the system of rules, practices, and processes by which a firm is directed and controlled.

Answer 13

Corporate governance

Question 14

a hybrid security that has no fixed maturity, has fixed payments and does not confer voting right on bondholders.

Answer 14

Preferred stock

Question 15

a security that has some elements that resemble equity and others that resemble debt.

Answer 15

Hybrid security

Question 16

a feature of preferred stock specifying that if a company ignores preferred stock dividends, it cannot pay anything to it common stockholders.

Answer 16

Dividend in arrears

Question 17

the sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth.

Answer 17

Capital investment

Question 18

the value of an asset as determined through fundamental analysis without referring to the asset’s market value.

Answer 18

Intrinsic Value

Question 19

a formula used to value preferred stock that is based on the calculation of a perpetuity.

Answer 19

Perpetuity model

Question 20

a formula used to value common stock based on the assumptions that dividends are paid every year and grow at a constant rate forever.

Answer 20

Gordon growth model

Question 21

a model used to evaluate common stock that calculates the vale of a share of common stock today by taking the present value of future dividend cash flows.

Answer 21

Dividend discount model

Question 22

a model used to determine the risk-return relationship for an asset.

Answer 22

Capital asset pricing model (CAPM)

Question 23

the process of evaluating and planning for purchases of long-term assets.

Answer 23

Capital Budgeting

Question 24

Companies or securities with beta greater than 1.

Answer 24

Aggressive Assets

Question 25

A variable that describes how the price of a security varies with the market.

Answer 25

Beta

Question 26

A legal contract that governs the relationship between a firm and its bondholders.

Answer 26

Bond Indenture

Question 27

A person who loans a corporation money by buying debt securities.

Answer 27

Bondholders

Question 28

The reduction in sales of a company’s own products due to introduction of another similar product.

Answer 28

Cannibalization

Question 29

Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment.

Answer 29

Capital Budgeting Criteria

Question 30

A debt instrument that is issued by a corporation in order to raise capital.

Answer 30

Corporate Bonds

Question 31

The stated interest rate of a bond; also known as coupon rate.

Answer 31

Coupon Yield

Question 32

Companies or securities with beta less than 1

Answer 32

Defensive Assets

Question 33

The sum of money that a corporation promises to pay at the expiration of a bond; also called par value.

Answer 33

Face Value

Question 34

Another name for bonds; a financial security in which the borrower pays a fixed interest payment to investors each year.

Answer 34

Fixed-income Securities

Question 35

Cash flows that result from accepting a project

Answer 35

Incremental Cash Flows

Question 36

The sum on money that a corporation promises to pay at the expiration of a bond; also called face value

Answer 36

Par Value

Question 37

A cost that has already been incurred and cannot be recovered

Answer 37

Sunk Costs

Question 38

The unlimited earnings potential of equity ownership

Answer 38

Upside Potential