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ROMA > FIN 312- Exam 2 (section 12-15) > Flashcards

FIN 312- Exam 2 (section 12-15) Flashcards

1
Q

Are issued by governments and corporations when they want to raise money.
- By buying you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date and to pay you periodic interest payments along the way, usually twice a year

A

bond

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2
Q

issuer, maturity, par value (or principal), coupon rate and frequency and currency denomination

A

The basic features of a bond include

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3
Q

the amount the issuer agrees to pay to the bondholder when the bond matures

A

Bond’s principal

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4
Q

is the interest rate that the issuer agrees to pay to the bondholder each year. It can be a fixed rate or a floating rate

A

Coupon rate

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5
Q

the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal

A

Yield to maturity

(it can be considered an estimate of the market’s expectation for the bond’s return)

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6
Q

The issuer pays a ____ interest rate for a long-term bond; investors will potentially earn greater returns on longer-term bonds but will incur additional risks

A

higher

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7
Q

Bonds can be bought and sold in the ______ after they are issued

A

“secondary market”

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8
Q

A bond’s yield is the actual ___ ___ an investor can expect if the bond is held to maturity

A

annual return

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9
Q

A bond’s price always moves in the opposite direction of its yield

If interest rates fall → older bonds become ____ because they were sold in a higher interest rate environment and therefore have ____ coupons

A

more valuable; higher
(talking about bonds)

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10
Q

If interest rates rise → older bonds may become _____ bc their coupons are relatively low, and older bonds, therefore, trade at a _____

A

less valuable; “discount”
(talking about bonds)

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11
Q

In the market, bond prices are quoted as a percent of the bond’s _____

A

face value (also can say par value)

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12
Q

Rising interest rates → New bonds will pay investors ____ interest rates than old ones (old bonds drop in price)

Falling interest rates → ____ bonds pay higher interest rates than new bonds (old bonds tend to sell at a premium)

A

higher; Older

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13
Q

a weighted average of the present value of a bond’s cash flow
- expressed in years

A

Duration

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14
Q

The ____ ____ ___ can be calculated for an entire bond portfolio, based on the durations of the individual bonds in the portfolio

A

weighted average duration

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15
Q

For zero-coupon bonds → maturity and duration are ____ (since there are no regular coupon payments and all cash flows occur at maturity)

A

equal

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16
Q

a conservative investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio
- offers interest at a set rate that is often higher than short-term savings rate

A

Capital preservation

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17
Q
  • capital preservation
  • income
  • diversification
  • potential hedge against economic weakness or deflation
  • capital appreciation
A

reasons why investors purchase bonds
(role of bonds in a portfolio)

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18
Q

a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents

A

portfolio

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19
Q

selling bonds after they have risen in price – and before maturity – investors can realize price appreciation

A

capital appreciation

(the difference between the purchase price and the selling price of an investment)

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20
Q

Bond prices can rise for several reasons, including a drop in ____ and an improvement in the _________

A

interest rates; credit standing of the issuer

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21
Q
  • When the price of goods and services are rising (inflation) → a bond’s fixed income becomes ___ attractive
  • Slower economic growth usually leads to lower inflation → makes bond income more attractive
  • An economic _____ → typically bad for corporate profits and stock returns, adding to the attractiveness of bond income as a source of return
  • _____ → bond income becomes even more attractive (bc bondholders can buy more with the same bond income)
A

less; slowdown; Deflation

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22
Q
  • government bonds
  • corporate bonds
  • Emerging market bonds
  • Mortgage-backed and asset-backed securities
A

types of bonds

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23
Q
  • includes “Sovereign” debt
  • sovereign bonds that are linked to inflation → treasury inflation-protected securities (TIPS)
  • provides a “real” or inflation-adjusted return
A

government bonds

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24
Q

some agency bonds are guaranteed by the central government, while others are not. Supranational organizations, like World Bank borrow in the bond market to finance public projects and/or development

A

Agency and “quasi-government” bonds
(type of gov bond)

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25
Q

Whether provinces, states or cities borrow to finance a variety of projects (from bridgers to schools).
- In the US Municipal bonds (munis) may enjoy a tax advantage over other bonds

A

Local government bonds
(type of gov bond)

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26
Q

corporations borrow money in the bond market to expand operations or fund new business ventures

A

Corporate bond

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27
Q
  • Investment Grade
  • Speculative-grade (junk) bonds
A

2 types of corporate bonds

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28
Q
  • Tend to be issued by newer companies, companies in particularly competitive or volatile sectors, or companies with troubling fundamentals
A

Speculative-grade bonds

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29
Q

sovereign and corporate bonds issued by developing countries
- Can help diversify an investment portfolio and can provide potentially attractive risk-adjusted returns

A

Emerging market bonds

30
Q

“securitization” in which the cash flows from various types of loans (mortgage payments, car payments or credit card payments) are bundled together and resold to investors as bonds (Largest sectors involving securitization)

A

Mortgage-backed and asset-backed securities

31
Q

Created from the mortgage payments of residential homeowners
- are sensitive to changes in prevailing interest rates and can decline in value when interest rates rise

A

Mortgage-backed securities (MBS)

32
Q

created from car payments, cc payments, and other loans
- similar loans are bundled together and packaged as a security that is then sold to investors
- are usually “tranched” meaning that loans are bundled together into high-quality and lower-quality classes of securities

A

Asset-backed securities (ABS)

33
Q

german securities secured by mortgages
- banks that make loans and package them into ….. keep those loans on their books

A

Pfandbriefe and covered bonds

34
Q

Include buying and holding bonds until maturity and investing in bond funds or portfolios that track bond indexes

A

Passive investment strategies

35
Q

try to outperform bond indexes, often by buying and selling bonds to take advantage of price movements

A

Active investment strategies

36
Q

To ____ _____ successfully over the long term, ____ ____ requires the ability to

1) Form opinions on the economy, the direction of interest rates and/or the credit environment
2) Trade bonds efficiently to express those views
3) Manage risk

A

outperform indexes; active investing

37
Q
  • Credit analysis
  • Macroeconomic analysis
  • Sector rotation
  • Market analysis
  • Duration management
  • Yield curve positioning
  • roll down
  • Derivatives
  • Risk management
A

types of active strategies
(Active managers can employ a number of different techniques to find bonds that could rise in price)

38
Q

uses a variety of strategies to maximize capital appreciation
- Active bond portfolio managers seeking price appreciation try to buy undervalued bonds, hold them as they rise in price, and then sell them before maturity to realize the profits

“buying low and selling high.”

A

Total return investing

39
Q

using fundamental, “bottom-up” ; bond prices may increase when a company brings in new and better management

used to measure the issuer’s ability to meet its debt obligations.

A

Credit analysis

40
Q

Portfolio managers use top-down analysis to find bonds that may rise in price due to economic conditions, a favorable interest rate environment or global growth patterns

A

Macroeconomic analysis

41
Q

based on their economic outlook, bond managers invest in certain sectors that have historically increased in price during a particular phase in the economic cycle and avoid those that have underperformed at that point.

A

Sector rotation
(active strategy for bond investments)

42
Q

Portfolio managers can buy and sell bonds to take advantage of changes in supply and demand that cause price movements

A

Market analysis

43
Q

managers anticipating a rise in interest rates can attempt to protect bond portfolios from a negative price impact by shortening duration, possibly by selling some longer-term bonds and buying short-term bonds.

A

Duration management

44
Q

bond managers can use futures, options and derivatives to express a wide range of views, from the creditworthiness of a particular issuer to the direction of interest rates

A

Derivatives

45
Q

2 types of buy-and-hold approach (passive investment)

A
  • bond ladder
  • barbell
46
Q

investors pay for bonds when they first invest and again when they need to reinvest their money at maturity

A

Buy-and-hold approach

47
Q

a bond portfolio is invested equally in bonds maturing periodically, usually every year or every other year

A

Bond ladder

48
Q

money is invested in a combination of short-term and long-term bonds; as short term bonds mature, investors can reinvest to take advantage of market opportunities while the long-term bonds provide attractive coupon rates

pairing high-risk, high-return investments with lower-risk, lower-return investments in an attempt to reduce risk without diminishing overall return

A

Barbell

49
Q

1) Going from being a private business entirely funded by the owner to accessing the private equity markets (venture capital)
2) Going from private to public with an initial public offering
3) Public companies making seasoned offering of debt and equity

A

3 transitional periods
(Financing choices across the business cycle)

50
Q

sources of funds

A

1) retained earnings
2) debt capital
3) equity capital

51
Q

earnings that company does not distribute among shareholders

A

Retained earnings

52
Q

borrowed funds that must be repaid at a later date

A

Debt capital

53
Q

investor get tiny stake of ownership in the company

A

Equity capital

54
Q

PROS:
- reliable sources of funds
- Less expensive
- No dependency on 3rd party
- Quick source

CONS:
- Company would have no/less money to distribute to owner

A

retained earnings

55
Q

PROS:
- Most common source of finance
- Taking debt is relatively easier
- Less costly than other sources
- Interest payment help in reducing the tax liability

CONS:
- If company can’t make payments it may impact its reputation & even force it to go bankrupt

A

debt capital

56
Q

PROS:
- No obligation to pay back

CONS:
- A company is expected to share the profits with the shareholders
- May dilute company’s ownership control
- Does not offer any tax benefit

A

equity capital

57
Q

the process of offering shares of a private corporation to the public in a new stock issuance

A

initial public offering (IPO)

58
Q

a group of investment banks and broker dealers (syndicate) that is responsible for selling shares of the IPO to institutional and individual investors

A

Lead underwrite

59
Q

In addition to IPOs, there are other types of equity new issue offerings for companies with stocks that are already publicly traded:

A

follow-on offering & secondary offering

60
Q

a fixed-income corporate debt security that yields interest payments but can be converted into a predetermined number of common stock or equity shares

A

convertible bonds

61
Q

for convertible bonds, if….

Value > nominal value = _____

A

convert bond to stock

62
Q
  • international trade
  • licensing
  • franchising
  • joint ventures
  • Acquisition of existing operations
  • Establishing new for subsidiaries
A

6 most common methods firms use to conduct international business

63
Q

Minimal risk, minimal capital at risk, possible exit at low cost

(a common method firms use to conduct international business)

A

international trade
(a common method firms use to conduct international business)

64
Q
  • No need of significant investment
  • Difficult to ensure quality control in the foreign production process

(a common method firms use to conduct international business)

A

licensing

65
Q

A type of business where a trademark is licensed, the system for operating the business, or the appearance of the location

  • No major investment in foreign countries
A

franchising
(a common method firms use to conduct international business)

66
Q

…. jointly owned and operated by two or more firms

  • Risk of sharing control and leadership
A

joint ventures
(a common method firms use to conduct international business)

67
Q
  • High returns possible, but also risk of large losses; large investments; smaller investments and risks for partial …
A

Acquisition of existing operations
(a common method firms use to conduct international business)

68
Q
  • High returns possible, but also risks of large losses; tailoring usually requires time to market (need of time to gain market share)
A

Establishing new for subsidiaries
(a common method firms use to conduct international business)

69
Q

category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy

A

Direct foreign investment (FDI)

70
Q

MNCs commonly consider direct foreign investment because it can improve their ____ and enhance ____ ____

A

profitability; shareholder wealth

71
Q
  • Attract new sources of demand
  • Enter profitable markets
  • React to trade restrictions
  • Exploit monopolistic advantages
  • Diversify internationally
A

Motives MNCs that are attempting to boost revenues

72
Q
  • Use foreign factors of production
  • Use of foreign raw materials
  • Use foreign technology
  • React to exchange rate movements
  • Fully benefit from economies of scale
A

Motives MNCs that are trying to cut costs

ROMA (9 decks)

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