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FIN 3110 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

a dollar today will be worth ___ than a dollar in the future

A

more

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2
Q

when we convert a single value at one time to an equivalent value at another time

A

lump sum

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3
Q

compound interest is based on

A

past interest earned

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4
Q

same cash flow every period for a limited duration

A

perpetuities

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5
Q

payments occur at the end of each period

A

ordinary annuity

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6
Q

payments occur at the beginning of each period

A

annuity due

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7
Q

the rate that the bank is required to report

A

APR (annual percentage rate)

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8
Q

the actual return earned in a year

A

EAR (Effective Annual Rate)

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9
Q

three types of loans

A
  • pure discount
  • interest only
  • amortized
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10
Q

loan with regular payments plus an extra payment at the end

A

ballon payment

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11
Q

short-term bonds

A

notes

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12
Q

what states the relationship between issuer and bondholder

A

identure

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13
Q

a company can raise capital by

A

selling bonds to investors

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14
Q

who gets paid first

A

senior/ unsubordinated bonds

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15
Q

who gets paid last

A

junior/ subordinated bonds

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16
Q

limits placed on what the company can do

A

protective covenants

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17
Q

protective convenants include:

A
  • can’t sell major assets w/o bondholder
    approval
  • can’t pay dividends over stated limit
  • can’t issue debt more than senior bonds
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18
Q

allows the company to repurchase the bonds at a prespecified price

A

call option

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19
Q

gives the bond holder the right to sell the bonds back to the company at a prespecified price

A

put option

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20
Q

allows the bondholder to convert their bonds to shares of common stock at a prespecified ratio

A

conversion ratio

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21
Q

its more valuable to trade a bond when

A

price increase

22
Q

its more valuable to hold a bond when

A

price decrease

23
Q

BBB and above

A

investment grade bonds

24
Q

BB and below

A

junk bonds

25
Q

junky bonds have

A

high yield with high risk

26
Q

with floating rate bonds, inflation inc and cash flow____

A

increase

27
Q

have short maturities

A

T-bills

28
Q

have intermediate maturities

A

T-notes

29
Q

have long maturities

A

T-bonds

30
Q

bonds that sell lower than its face value

A

discount

31
Q

bonds that sell higher than its face value

A

premium

32
Q

When the price equals the face value

A

par value

33
Q

preferred stock is

A

fixed

34
Q

the issuing firm has the right to repurchase the preferred stock at a pre-specified price

A

callable preferred stock

35
Q

residual ownership of the company

A

common stock

36
Q

the two conditions to use the constant growth formula

A
  • dividend can never change
  • growth rate must be lower than the required rate of return
37
Q

Voting rights of Common stockholders

A
  • elect directors
  • approve compensation plans
  • approve mergers
  • approve company name changes
  • approve other proposals
38
Q

Common stockholders have

A
  • voting rights
  • dividend rights
  • liquidation rights
  • preemptive rights
39
Q

give someone else the right to vote their shares, and how to cast their votes

A

proxy voting

40
Q

the present value of an ___ is determined by dividing the annual cash flow by the interest rate

A

perpetuity

41
Q

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years.

A

decrease

42
Q

The effective rate of interest will always be ____ the nominal rate.

A

greater or equal to

43
Q

Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm:

A

bonds, preferred stock, common stock

44
Q

When the required rate of return is ____ the coupon rate, the bond will sell at a discount.

A

greater

45
Q

The call feature is an advantage to the issuing firm

A

if interest rate declines

46
Q

The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables except:

A

the required rate of return on the bond

47
Q

Characteristic of common stock

A
  • no maturity date
  • considered a permanent form of long -term financing
  • is a residual form of ownership
48
Q

One of the assumptions of the constant growth dividend valuation model is that

A

the required rate of return is greater than the dividend growth rate

49
Q

common stock dividends are normally paid

A

quarterly

50
Q

an annuity that begins more than 1 year in the future is referred to as an

A

deferred annuity

FIN 3110 (2 decks)

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