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Part II Chapter 6 Flashcards

1
Q

additional paid-in capital (APIC)

A

An equity account that reflects the difference at the
time of issue between the par value and the issuance
price (less underwriting costs) of any new stock sold
by a company.

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2
Q

bond

A

A debt investment in which an investor loans money
to an entity (corporate or governmental) that
borrows the funds for a defined period of time, at a
fixed or variable interest rate.

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3
Q

bond indenture

A

A legal document that outlines the rights and
obligations of the borrower and lender. It is a
contract between the company and the debt holders,
which includes various restrictive covenants that
impose constraints on the actions of the company’s
management.

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4
Q

book value per share

A

Total common stockholders’ equity divided by the

number of shares outstanding.

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5
Q

call premium

A

Compensation to investors for early redemption of a

debt instrument.

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6
Q

call provision

A

A provision that gives the issuing entity the right
to call in a debt issue for redemption prior to the
original maturity.

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7
Q

capital investment

A

Funds used by a business to purchase long-term,
typically fixed assets, such as land, machinery, or
buildings.

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8
Q

capital markets

A

A structure in which individuals and institutions trade
financial securities with maturities in excess of one
year. Organizations/institutions in the public and
private sectors also often sell long-term (debt and/or
equity) securities on the capital markets in order to
raise funds.

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9
Q

collateral

A

Assets used as security for a loan or bond issue. They
may include physical assets (e.g., plant, equipment,
and inventory) or financial assets (e.g., receivables
and marketable securities).

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10
Q

collateral trust bond

A

A type of financial instrument backed by securities of
other companies that are owned by the firm issuing
the bond.

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11
Q

comfort letter

A

A letter from another party stating actions that it will
or will not take on behalf of the borrower. This type
of agreement is not legally enforceable.

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12
Q

common stock

A

A security that represents ownership in a company

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13
Q

convertible bond

A

A type of corporate debt security that can be
converted by the holder, or sometimes the issuer,
into shares of common or preferred stock at a fixed
ratio.

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14
Q

cost of capital

A

A measure of the cost a company would incur to

raise funds to make investments in assets.

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15
Q

covenant

A

An additional requirement that is placed on debt
or bond issues and that imposes constraints on the
actions of the company’s management.

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16
Q

credit enhancement

A

An addition to a borrowing arrangement or debt
securities issue meant to improve the overall credit
rating on the loan or issue. It generally provides
either a guarantee of payment in the event of default
or an agreement to provide financing to roll over the
debt issue.

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17
Q

crowdfunding

A

A private financing technique used, typically by
start-up or smaller companies, to access equity
finance. The process usually involves a relatively large
number of investors who each pledges a relatively
small amount of funding.

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18
Q

cure period

A

A period of time, often specified in a loan agreement,
in which an event of default may be corrected before
the lender may pursue default remedies.

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19
Q

custodian

A

A third party that typically takes possession of
securities, receives delivery or book entry of principal
and interest payments, performs record keeping, and
provides maintenance services for an investment
portfolio.

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20
Q

debentures

A

Unsecured bonds that represent general claims
against the issuer organization’s assets and/or cash
flows, and may carry a higher interest cost (to the
issuer) than secured bonds.

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21
Q

debt indenture

A

The contract between the issuing entity of a bond

and the bondholders.

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22
Q

debt market

A

A financial market in which participants can issue

new debt, or buy and sell debt securities.

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23
Q

defeasance of debt

A

A financial management method that removes debt from an organization’s balance sheet without actually retiring the debt issue. In this arrangement, the borrower places sufficient funds in escrow, usually in government securities, to pay for interest and principal on the debt issue. Because control of both the debt and escrow funds is relinquished, and payment and retirement of the debt issue is now guaranteed, this debt and the related securities can be removed from the balance sheet and do not need to be considered in relation to any restrictive covenants the organization may have regarding debt.

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24
Q

depositary receipt (DR)

A

A type of negotiable financial instrument (typically
equity securities) that trades on a local exchange
but actually represents stock ownership in a foreign,
publicly listed company.

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25
economic development bond
A type of bond typically issued by a developing country or sponsoring organization, such as the World Bank or the International Monetary Fund, for the express purpose of fostering development of infrastructure and related projects.
26
equipment trust certificate
A type of bond that is secured by movable equipment (e.g., an aircraft, a fleet of trucks, or railroad equipment).
27
equity market
A market where shares are issued and traded.
28
equity securities
Stock (shares) that represents the ownership of | publicly owned corporations
29
Eurobond
A type of bond sold simultaneously in many countries outside the country of the borrower and denominated in a currency other than that of the country in which it is issued.
30
event of default
An action or circumstance by which a borrower breaches or violates any term or condition under a debt agreement.
31
floating-rate debt
A type of debt issue that carries interest payments that reset periodically based on movement in a representative interest rate index.
32
foreign bond
A type of bond sold in a particular country by a foreign borrower, but usually denominated in the domestic currency of the country where issued.
33
full guarantee
A level of guarantee for a subsidiary in which the guaranteeing party (the parent organization or another party) fully guarantees any borrowing arrangement by the subsidiary and agrees to take over the loan if the subsidiary fails to make timely payments.
34
government-sponsored enterprise | GSE
A company that is created by a national government in order to participate in or help support various commercial activities on the government’s behalf.
35
green bond
A type of bond used by federally qualified organizations to raise funds to promote sustainability by developing underutilized or abandoned properties.
36
high-yield bond
A high-paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds, and municipal bonds.
37
hybrid security
A type of security that is generally created by combining the elements of two or more different types of securities into one.
38
income bond
A type of bond that pays interest only if a company has profits, thus reducing some of the risk of issuing debt from a company’s viewpoint.
39
index bond
A type of bond that has interest rates tied to an economic index. Index bonds are used most often when a high level of price inflation is present or possible.
40
initial public offering (IPO)
The first sale of stock by a private company to the | public.
41
intermediate-term note
A note with a maturity of two to ten years.
42
investment banker
A professional who is responsible for assisting issuers | in the design and placement of securities issuances.
43
lead bank/institution
The financial institution that is responsible for managing a syndicated loan or securities sale that is funded by multiple financial institutions.
44
lien
A legal claim on an asset or assets
45
London Interbank Offered Rate (LIBOR)
An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.
46
long-term bond
A bond with a maturity of 10 to 30 years.
47
material adverse change (MAC) clause
A clause in a loan agreement that allows a lender to refuse funding or declare a borrower to be in default, even if all agreements are in full compliance, if the lender believes a material change has occurred to the detriment of the borrower’s condition.
48
maturity matching
A practice that involves pairing the life of a debt issue to the life of the specific assets financed or the maturity of an investment to the future need for funds.
49
mortgage bond
A type of bond used to finance specific assets, such as real estate, that are pledged as security against the issue.
50
multicurrency bond
A type of bond that is usually issued as (1) a currency option bond that allows investors to choose among several predetermined currencies, or (2) a currency cocktail bond that is denominated in a standard basket of several currencies.
51
municipal bond (muni)
A sub-sovereign bond issued by a municipality, typically in the United States and usually in the form of a general obligation or revenue bond.
52
off-balance-sheet financing
A type of arrangement designed to provide financing | that does not appear on the balance sheet.
53
operating lease
A type of lease that is established in such a way that the lessor may maintain the equipment and retain ownership thereof at the end of the lease.
54
origination
An investment bank function that involves consultation with a company raising funds about the characteristics of a securities issue and any underlying documents.
55
origination desk
A subset of trading professionals who are charged with evaluating, pricing, and managing the placement of new security issues.
56
personal guarantee
A type of guarantee in which a lender may require a pledge on the part of the owner or other principals in a business before granting a loan to the business.
57
pledge
A binding promise in which a borrower offers collateral to a lender as security, usually in return for a loan.
58
political risk
A term applied to a variety of actions that a government may take that negatively impact a company’s operations and/or value.
59
preferred stock
An investment security that is a type of equity, but is different from common stock in terms of its stockholder rights and dividend payment streams. In terms of cash flows, it is more like debt than equity because of the fixed dividend payments.
60
primary market
A financial market that offers newly issued debt and equity securities to investors when firms or government units sell securities to raise funds.
61
private market
A financial market for direct placement, in which securities are offered and sold to a limited number of investors, and not offered to the general public. The investment banking firm, acting as a broker to bring the issuer and investors together, meets with prospective buyers and confirms the details of the offering.
62
put provision
A condition that allows a bondholder to resell a bond back to the issuer at a preestablished price on certain stipulated dates prior to maturity.
63
rating agency/credit rating agency
A company that assigns credit ratings that, in its opinion, rate a debtor’s (1) ability to pay back debt by making timely interest payments and (2) likelihood of default.
64
representations
Along with warranties, these are the existing conditions at the time when a loan agreement is executed, as attested to by the borrower
65
seasoned equity offering (SEO)
A type of stock offering in which new stock shares are sold by a company that has shares already trading on an exchange or in the over-the-counter market.
66
secondary market
A financial market that trades previously issued | securities.
67
securities exchange
An organized stock exchange that facilitates the | buying and selling of debt and equity securities.
68
securitization
The practice of pooling various debt contracts, such as consumer loans, credit card debt, and mortgages, and using them as a basis for issuing securities.
69
sinking fund
A fund that is the result of a provision that may be attached to a bond or preferred stock issue. It generally requires the issuer to set aside this pool of funds, which can be used to repay the bond’s principal at maturity
70
SOFR: Secured Overnight Financing Rate
Published daily by the New York Federal Reserve, this rate is an indication of the cost of overnight cash collateralized by US Treasury securities.
71
SONIA: Sterling Overnight Index Average
Published by the Bank of England, this is seen as a market replacement for LIBOR for GBP-denominated transactions.
72
sovereign bond
A bond issued by a national government and typically denominated in the currency of the issuing government.
73
special drawing right (SDR)
An artificial currency, created by the International Monetary Fund, whose asset value is based on a basket of currencies consisting of the euro, Japanese yen, British pound sterling, and US dollar.
74
specific-project guarantee
A type of loan guarantee in which the guaranteeing party guarantees only loans relating to specific projects of the subsidiary, rather than all loans.
75
sub-sovereign bond
A type of bond issued by a level of government below the national or central government, which includes regions, provinces, states, and municipalities.
76
syndicate
A group of banks that work together, typically to | underwrite a securities issue or arrange a loan.
77
tender option bond
A type of bond that allows the holder to redeem the | bond either once during its life or on specified dates.
78
term loan
A type of loan with a fixed maturity, usually greater than one year, that can be repaid either in installments or in a single payment.
79
term note
A medium-term debt instrument, typically with terms from two to ten years, issued by an organization. In most cases, these notes pay interest at periodic intervals.
80
tracking stock
A special type of stock that is a separate stock created by a parent company to track the financial progress of a particular line of business.
81
underwriting
An investment bank function, this is the act of purchasing all or a part of a block of securities issued by a company and thereby becoming responsible for their ultimate distribution.
82
warranties
Along with representations, these are the existing conditions at the time when a loan agreement is executed, as attested to by the borrower.
83
zero-coupon bond
A debt security that does not pay interest (a coupon) but is traded at a deep discount, rendering a profit at maturity when the bond is redeemed for its full face value.

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