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financial markets > midterm > Flashcards

midterm Flashcards

1
Q

the occurrence or non-occurrence of an event

A

probability

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2
Q

the return made after the probability of occurrence

A

expected return

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3
Q

a collection of investment which all owned by single individual or a firm

A

portfolio

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4
Q

is the exposure of uncertainty and danger resulting in changes

A

risk

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5
Q

important factor in investment decision

A

risk

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6
Q

2 classification of risk

A

systematic risk
unsystematic risk

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7
Q

sometimes called non-controllable or undiversifiable risk

A

systematic risk

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8
Q

7 example of systematic risk

A

currency risk
equity risk
inflation risk
country risk
interest rate risk
purchasing power risk
event risk

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9
Q

that business operations or an investment value will affected by changes in the exchange rates

A

currency risk

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10
Q

is the risk that the market value of the share will be increase or decrease

A

equity risk

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11
Q

is the possiblity that the value of the asset or income will decrease as inflation shrinks

A

inflation risk

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12
Q

potential volatility of foreign stock

A

country risk

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13
Q

is the possiblity that the value of a security, purchasing bonds, is reduced due to an increase in the interest rate

A

interest rate risk

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14
Q

is the risk that inflation will erode the purchasing power of the portfolio of securities

A

purchasing power risk

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15
Q

the uncertainty that an unexpected events will happen

A

event risk

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16
Q

sometimes called controllable or diversifiable risk

A

unsystematic risk

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17
Q

5 example of unsystematic risk

A

principal risk
credit risk
liquidity risk
call risk
business risk

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18
Q

is the risk of losing the amount invested due to bankruptcy or default

A

principal risk

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19
Q

the bond issuers delay the payment of the principal and interest

A

credit risk

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20
Q

risk arise from difficulty in selling an asset

A

liquidity risk

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21
Q

cash flow risk resulting from the possibility that a collable bond is redeemed before maturity

A

call risk

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22
Q

is the risk associated with the unique circumstances of a particular company

A

business risk

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23
Q

standard deviation is computed

A

measure risk

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24
Q

is widely used measure the volatility.

A

standard deviation

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25
Q

steps in computing standard deviation

A
  1. multiply the expected individual return by the probability distribution
  2. subtract the expected average return from the return
  3. square the difference
  4. multiply the squared difference and multiply the product by the probability distribution
  5. square the results in step 4
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26
Q

is a statistical measure of the distribution of the data points in a data series around the mean

A

coefficient of variation

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27
Q

associated with the total risk of the portfolio

A

portfolio risk

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28
Q

a common problem that individual and firms encounter when making an investment

A

required rate of return

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29
Q

computed as the weighted average of the beta

A

portfolio beta

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30
Q

usually paid on installment

A

debts

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31
Q

(5) advantage of issuing long term debts

A
  1. unlike dividends declared, The interest can serve as a “tax shield”
  2. long term debts help increase a firm’s EPs
  3. the repayment of the long term debt (in pes) is cheaper during time of inflation
  4. the outstanding shares of stock are not deluted because new share of stocks are not issued
  5. the issuers of the bonds enjoy financial flexibility because of the call provisions in the bond indenture. a call provisions permits a firm to redeem the bonds before the maturity date.
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32
Q

(4) disadvantage of issuing long term debts

A
  1. a scheduled interest payment is required regardless of the firm’s actual earnings
  2. the firm’s with considerable amount of outstanding loans does not project a “healthy” financial position
  3. companies with high financial leverage normally pays a higher interest due to their low credit rating
  4. a covenant provision in the indenture which subject a firms to certain constraints is very common
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33
Q

(5) debt financing is advisable

A
  1. the firms revenue and earnings are stable
  2. the firms has adequate liquidity and determinable cash flow
  3. the firm has a low debt-to-equity ratio
  4. inflation is expected
  5. the indenture on the debt contract are not bordensome
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34
Q

(2) major forms of long term debts

A

publicly issued obligation
direct or private placement

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35
Q

as the term itself indicates, obligation which are issued publicly

A

publicly issued obligation

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36
Q

obligations placed by individuals directly to a company

A

direct or private placement

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37
Q

are obligation granted by banks or other financial institution

A

mortgage

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38
Q

is called mortgagor

A
  • borrower
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39
Q

is called mortgages

A

-lender

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40
Q

are issued to help the borrower financing

A

-mortgages

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41
Q

3 advantage of using mortgage

A
  1. lower interest rate
  2. less covenant on financing
  3. extended maturity date on the payment of principal and interest
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42
Q

a long term debts in which the corporation that issued

A

-bonds

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43
Q

which describes the features of the bond issuance

A

-bond indenture

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44
Q

3 requisite of mortgage

A
  1. the mortgage is constituted to secure the fulfillment of the obligation
  2. the absolute owner of the property to be mortgaged is the mortgagor himself/herself
  3. the mortgagor has free disposal of the asset to be mortgaged
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45
Q

two types of covenant

A

protected covenant
negative covenant

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46
Q

states the action or condition which a company should do.

A

protected covenant

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47
Q

states the action or condition which a company should not do.

A

negative covenant

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48
Q

states that if any the condition in the bond indenture is breached.

A

acceleration clause

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49
Q

6 possible provision of bond indenture

A
  1. details of the firm of the bond issued
  2. covenant
  3. call provisions
  4. conversion provisions
  5. retirement provision
  6. sinking fund provisions
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50
Q

the difference between the call price and the par value is called the?

A

-call premium

51
Q

3 terms of the bond issued

A
  1. the nominal rate or principal rate or face amount of the bond issuance
  2. the issue price
  3. the maturity date
52
Q

is the agreement as regards the nominal rate to be used when computing the interest and principal to be paid on the maturity date.

A

-The nominal rate or principal rate or face amount of the bond issuance

53
Q

is the price with which investor can buy the bonds when they are first issued

A
  • the issue price
54
Q

date on which the issuer has to repay the nominal amount

A
  • maturity date
55
Q

part of bond indenture that restricts certain action of the issuer

A

-covenants

56
Q

provides the issuer of the bonds with the right to redeem the bonds

A

-call provisions

57
Q

4 retirement provision

A

1.payment of the maturity date
2. conversion, if the bond issued are convertible
3. call, if the bonds have call feature
4. periodic payment, if the bond issued are sinking fund issues

58
Q

provisions which requires the issuing corporation to set aside an amount to pay off the bond issuance.

A

-sinking fund provisions

59
Q

are sold in equal denomination for convenience

A

-bonds

60
Q

is a bond that earns interest on specific intervas normally a period of six months

A

-ineterest bearing bonds

61
Q

is a bonds that bears no interest but is sold at a very big discount

A

-non-interest bearing bonds

62
Q

interest payment to the bondholders is called the?

A

-nominal interest

63
Q

bond sold below its price value, the bond is considered sold at a?

A

-discount

64
Q

bond sold above its price value is considered issued at a?

A

-premium

65
Q

is so called because particular assets are attached to it

A

-secured debenture

66
Q

is a real estate collateral is involve, these bonds are known as?

A

-mortgage bonds

67
Q

(2) forms of sinking fund provisions

A
  1. the trustee receives cash payment from the corporation that issued the bonds from the payment received the trustee then calls the bond the sinking fund call price
  2. the bonds are purchase in the open market
68
Q

11 types of bonds

A
  1. term bonds
  2. serial bonds
  3. secured bonds
  4. unsecured bonds
  5. registered bonds
  6. coupon or bearer bonds
  7. the holders of the convertible bonds
  8. callable bonds
  9. guaranteed bonds
  10. junk bonds
  11. floating rate bonds
69
Q

(4) features of bond issue

A
  1. a bond indenture or deed of trust is a detailed documents which contains the Essential information regarding bond issued. it also includes the right and duties of the borrower and other parties to the contract.
  2. a bond certificate which represents the portion of the total loan is used. the usual minimum denomination is 1000 although smaller denomination are occasionally issued.
  3. if the firm is pledge as a security of the bond issued the trustee will hold the title to the property serving as security is identified. the trustee acts as representative of bondholders and is usually bank or trust company.
  4. the bank or trust company is appointed as a registrar or disbursing agent. the issuing firm deposit the interest and principal payment to the disbursing agent who will then distribute the funds to the bondholders. in other words, the bank or trust company is the one which ensure that all the term and covenant indicated in the indenture are followed strictly by the issuing firm.
70
Q

bonds that mature on a single date

A

-term bonds

71
Q

bonds in which principal amount matures in series of payment rather than a single payment

A

-serial bonds

72
Q

is the same as straigh bonds

A

-term bonds

73
Q

bonds issued with fixed asset pledge as collateral

A

-secured bond

74
Q

this type of bond is not commonly accepted by bondholders

A

-open end mortgage bonds

75
Q

equipment is used as a collateral to a bond issuance, it is called an?

A

-equipment obligation bonds

76
Q

a bond issued without collateral

A

-unsecured bonds

77
Q

another example of debenture bonds

A

-subordinated bonds

78
Q

is also an unsecured bonds

A

-income bond

79
Q

required that the name of the bondholders be registered in the book of the corporation

A

-registered bond

80
Q

are bonds where a sheet of coupon are attached to the bond certificate

A

-coupon or bearer bond

81
Q

can exchange the bonds for a predetermined number of shares of corporate stock

A

-the holders of convertible bond

82
Q

are bonds which may be called for redemption prior to the maturity date

A
  • callable bonds
83
Q

are made when a company or individual accepts the obligation to pay the interest and principal in case of default

A

-guaranteed bonds

84
Q

the one who accepts the guarantee of payment is called the?

A

-guarantor

85
Q

are high risk, high yield bonds issued by companies

A

-junk bonds

86
Q

are type of bonds where the interest payment changes due to the fluctuation in the interest rate

A

-floating rate bond

87
Q

Repayment Capacity
(5)

A
  1. leading market position in well established industries
  2. high rates of return on fund employed
  3. conservative capitalization structure and moderate reliance on the debt and asset protection
  4. board margin in earning coverage of fixed financial charges and high internal cash generations
  5. well established access to a range of financial market and assure sources of alternative liquidity
88
Q

also known as bond refinancing

A

-bond refunding

89
Q

refers to issuance of new bonds to pay off outstanding bonds

A

-bond refunding

90
Q

strongest capability for time payment

A

prs 1 (best grade)

91
Q

above average capability for payment

A

prs 2 (better grade)

92
Q

satisfactory capability for payment

A

-prs 3 (good grade)

93
Q

minimal assurance for the timely payment

A

-prs4

94
Q

capability to pay interest or principal of debt

A

-prs 5

95
Q

payment of interest or principal of debt

A

prs 6

96
Q

smaller degree of investment risk

A

prs Aaa

97
Q

margin of protection

A

-prs aa

98
Q

with favorable investment attribute

A

prs a

99
Q

neither highly protected not poorly secured

A

prs baa

100
Q

judge to have speculative elements

A

prs ba

101
Q

generally lack the characteristics of desirable investment

A

prs b

102
Q

poor standing

A

prs caa

103
Q

very poor standing

A

prs ca

104
Q

in default

A

prs c

105
Q

2 ways financing a stock purchase

A

purchasing stock with cash on hand
purchasing stock on margin

106
Q

market organized for the trading of shares

A

stock exchange

107
Q

is the financial institution designated by issuing company to facilitate the sale of the share of stock based on a predetermined agreement

A

underwrite

108
Q

5 composition of equity

A

capital stock
subscribed capital stock
additional paid in capital
retained earnings
treasury stock

109
Q

represent the amount paid by the stock holders where in cash

A

capital stock

110
Q

represents the portion of the authorized capital stock which has been subscribed but not yet fully paid

A

subscribed capital stock

111
Q

portion of the paid in capital which exceed the par pr stated value

A

additional paid in capital

112
Q

represent the cumulative balance of the periodic earnings

A

retained earnings

113
Q

are allotted for future business expansion

A

appropriated retained earnings

114
Q

are used to declare dividend

A

unappropriated retained earnings

115
Q

corporations own stock that has been issued and then reacquired but not cancelled

A

treasury stock

116
Q

is the stated value as specified certificate of stock

A

par value of the stock

117
Q

6 common source of additional paid in capital

A
  1. excess amount paid over the par or stated value
  2. resale of the Treasury stock at price which is more than the redemption cost
  3. donated capital
  4. issuance of detachable, stock purchase warrants
  5. distribution of stock dividends
  6. quasi reorganization and recapitalization
118
Q

preferred stocks are?

A

frequently cumulative

119
Q

is not entitled to receive dividends

A

non cumulative preferred stocks

120
Q

means that the holder of the stock have the right to participate in the earnings

A

participating preferred stocks

121
Q

is one that does not participate in remaining dividend

A

non participating preferred stocks

122
Q

is the current selling price of a stock as perceived by the market

A

market price per share

123
Q

represent the option of the current stockholders

A

the stock right

124
Q

immediately prior to the exercise of the stock

A

market value of the share

financial markets (1 decks)

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