Flashcards in Exam 2 Test Questions (Concepts) Deck (37)
What are bond ratings?
This is when bonds from companies with similar risk and characteristics are grouped together into categories
i.e AAA, AAA, A, BBB, BB, B, CCC, D
In this example AAA is the highest quality bond and D being the lowest.
All bonds in the same bond market and having the same maturity have the same market interest rate - True or false
What does it mean to sell a bond at par?
This means the bond is being trading at its face value.
What does it mean to sell a bond at discount?
A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market.
What does it mean to sell a bond at a premium?
This means that the bond is being sold above its face value or at par value.
What is the interest rate relationship with bond prices?
The relationship that bond prices and interest rates have is an inverse relationship. Meaning
How is a bond price affected by maturity.
The further a bond is from maturity, the greater will be the difference between the purchase price and the redemption value at maturity. Let's look at an example.
What is the capital gains yield?
This is the capital gains(loss) due to changes in Rd. This is how much you earn when you sell a bond.
For firms when market interest rates are falling you should...?
Have an inventory of long term bonds to sell
I.e when rd decrease bond value s rise
When market interest rates bottom out and start to rise it is better to deal in...?
Short term bonds.
When Rd increases bond prices fall
Why is bond market rate is the required ROR for bond investing?
Because if your ROR is bond market rate it means you are at least making par on your investment..
look this one up.
What is a bond indenture?
An indenture is a legal and binding contract between a bond issuer and the bondholders. The indenture specifies all the important features of a bond, such as its maturity date, timing of interest payments, method of interest calculation, callable/convertible features if applicable and so on.
What is a bond convenant?
A bond covenant is a legally binding term of an agreement between a bond issuer and a bond holder. Bond covenants are designed to protect the interests of both parties. Negative or restrictive covenants forbid the issuer from undertaking certain activities; positive or affirmative covenants require the issuer to meet specific requirements
What is a bond provision?
A call provision is a provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds. If there is a call provision in place, it will typically come with a time window under which the bond can be called, and a specific price to be paid to bondholders and any accrued interest are defined.
What is interest rate risk?
This is the uncertainty concerning the future value of a bond due to changes in Rd.
What is reinvestment risk?
This is the income from a bond portfolio will vary because cash flows have to be reinvested at current market rates. When a bond matures they may not be able to reinvest the face value of that bond at a rate least favorable than the one currently being paid by that bond.
Who sells stock ?
Stock is initially sold by the firm.
What are share of stock used for?
to buy capital assets
TRUE OR FALSE:
Large quantities of stock are usually only issued once by a firm.
What is the equation for stock realized return?
Realized Return = Realized Gain/Cost of investment x 100
How do you determine the fair market value of a stock?
"The value of any financial asset is determind by discouting all future cash flows to the present(i.e find the PV @ t=0) and adding them up.
What is the equation to find expected total yield?
Expected Dividend Yield+expected capital gains yield
What is the cost of stock in essences?
A management goal
The Cost of stock- Know this word for word:Total Yield = EAR(rCPN) + Capital Gains Yield
"As Previously mentioned Rs (Required ROR from invesors perspectve) is also the cost of stock from a firms perspective The cost of stock is in essence a mangement goal:
Management must run the firm such that its value continues to improve
THis means that a firms Mgt must try to make stock total yield ( dividents & cap gains) match investors required ROR
If no investors buy less of the firsm outstanding sotck the stock falls in price due to ecreased emand the firm becomes more vulnerable to take over
When it comes to bond valuation what does m mean?
The number of compounding periods/payments per year
What is the coupon payment (CPN)?
This is the interest payment (periodic or simple)
What does yield to maturity mean (YTM)?
The average rate of return earned on a particular bond if it is bought at its current price and held to maturityTotal Yield = EAR(rCPN) + Capital Gains Yield
What is the equation to find a bonds total yield for the year?
Total Yield = EAR(rCPN) + Capital Gains Yield
A firm can feasibly influence it's WACC by doing what?
Attempting to buy back out standing stock