midterm

Question 1

Investors will pay a premium (higher price) for a bond that offers a higher coupon rate than the market yield.

Answer 1

premium

Question 2

based on the assumption that the company’s dividends represent the company’s cash flow to its shareholders.

Answer 2

dividend discount model

Question 3

annual rate of return of a bond that is held to maturity

Answer 3

yield to maturity

Question 4

aims to derive a stock’s theoretical price using the price multiples of similar companies.

Answer 4

comparable companies analysis

Question 5

a reduction in the value of an asset with the passage of time, due to wear and tear.

Answer 5

depreciation

Question 6

is a method of determining the intrinsic value (or theoretical value) of a stock.

Answer 6

stock valuation

Question 7

allow the bondholders to redeem these for a pre-specified amount of equity. The bond will typically offer a lower yield due to the added benefit of converting it into stock.

Answer 7

convertible bonds

Question 8

When an individual or entity cannot pay a creditor the pre-specified amount of interest or principal (based on a legal obligation), the person or entity may default, allowing the debtholder to claim their assets for repayment.

Answer 8

default

Question 9

Corporate bonds are issued by corporations and offer a higher yield relative to a government bond due to the higher risk of insolvency.

Answer 9

corporate bonds

Question 10

borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period.

Answer 10

bond issuer

Question 11

binding contract between an issuer and bondholder that outlines the characteristics of the bond.

Answer 11

indenture

Question 12

Investors will pay a discount (lower price) for a bond that offers a lower coupon rate than the market yield.

Answer 12

discount

Question 13

Bonds issued by local governments or states.

Answer 13

municipal bonds

Question 14

fixed-income securities that are issued by corporations and governments to raise capital

Answer 14

bonds

Question 15

may be redeemed by the company before the maturity date is reached, typically at a premium. It can be beneficial for a business operating in an environment where interest rates are decreasing because the firm can reissue bonds with a lower yield.

Answer 15

callable bonds

Question 16

Maturity between 1-10 years

Answer 16

treasury notes

Question 17

Maturity < 1 year

Answer 17

treasury bills

Question 18

interest payments that the issuer makes to the bondholder.

Answer 18

coupon rate

Question 19

Par Coupon rate < Yield

Answer 19

false

Question 20

concerns the comparison of the investment with similar companies.

Answer 20

relative stock valuation

Question 21

A bond with a high credit rating is considered investment-grade.

Answer 21

investment grade bond

Question 22

relies on the company’s fundamental information.

Answer 22

absolute stock valuation

Question 23

describe a drastic reduction in the recoverable amount of a fixed asset.

Answer 23

impairment

Question 24

comes with a credit rating of “BB” or lower and offers a high yield due to the increased risk of company default.

Answer 24

junk bond

Question 25

date that the bond expires, when the principal must be paid to the bondholder.

Answer 25

maturity

Question 26

make no coupon payments but are issued at a discounted price.

Answer 26

zero coupon bond

Question 27

The reduced yield is attributed to the federal government’s ability to print money and collect tax revenue, which significantly lowers their chance of default. The U.S. government’s debt is considered risk-free for this reason.

Answer 27

federal government bonds

Question 28

when there is a change in legal or economic circumstances surrounding a company or a casualty loss from unforeseen devastation.

Answer 28

impairment

Question 29

Maturity > 10 years

Answer 29

treasury bonds

Question 30

the intrinsic value of a stock is calculated by discounting the company’s free cash flows to its present value.

Answer 30

discounted cash flow model

Question 31

initial amount of money invested in the bond.

Answer 31

principal

Question 32

the total amount an asset has been depreciated up until a single point.

Answer 32

accumulated depreciation