1
Q
finite series of equal payments that occur at regular intervals
A
annuity
2
Q
If the first payment occurs at the end of the period, it is called an
A
ordinary annuity
3
Q
If the first payment occurs at the beginning of the period, it is called an
A
annuity due
4
Q
infinite series of equal payments
A
perpetuity
5
Q
Interest rate, rate of return, or discount rate per period—typically, but not always, one year
A
r
6
Q
t = what
A
number of periods
7
Q
Present value of a perpetuity of C per period PV =
A
C/r
8
Q
The interest rate expressed as if it were compounded once per year.
A
effective annual rate
9
Q
Used to compare two alternative investments with different compounding periods
A
effective annual rate
10
Q
The annual rate quoted by law
A
annual percentage rate
11
Q
APR = what
A
Periodic rate × Number of periods per year
12
Q
periodic rate = what
A
A P R÷Periods per year
13
Q
EAR formula is what
A
[1 + APR/m]^m - 1
14
Q
ear formula is what in excel
A
effect
15
Q
Suppose if you put it in another account, you earn 3 percent per quarter.
What is the A P R?
A
12%
16
Q
example of a pure discount loan
A
treasury bill
17
Q
what is a pure discount loan
A
Principal amount is repaid at some future date
18
Q
Interest paid =
A
Beginning balance × Rate
19
Q
Principal paid =
A
Total payment − Interest paid.
20
Q
Ending balance =
A
Beginning balance − Principal paid
21
Q
par value of a bond is what , when is it paid
A
face value, replied at maturity
22
Q
coupon interest rate is what
A
stated interest rate
23
Q
coupon payment = what
A
coupon interest rate times par value
24
Q
years until bond must be repaid
A
maturity
25
The market required rate of return for bonds of similar risk and maturity. Also symbolized as “r”.
yield to maturity
26
discount rate used to value a bond
yield to maturity
27
As interest rates increase present values of bonds...
decrease
28
As interest rates increase, bond prices
decrease
29
as bond price increases, what happens to yield to maturity
it decreases
30
what has more price risk, long term or short term bonds
long term bonds
31
what has more price risk, low or high coupon rates
low coupon rates
32
what have more reinvestment rate risk, long or short term bonds
short term bonds
33
Uncertainty concerning rates at which cash flows can be reinvested.
reinvestment rate risk
34
what have more reinvestment rate risk high or low coupon rate bonds
high coupon rate bonds
35
Market required rate of return implied by the current bond price.
YTM
36
debt or equity - is an ownership interest
equity
37
debt or equity - no voting rights
debt
38
is it debt or equity - interest is tax deductible
debt
39
is it debt or equity - creditors have legal recourse if interest or principal payments are missed
debt
40
debt or equity - dividends are not tax deductible
equity
41
can an all equity firm go bankrupt
no
42
collateral bonds secured by
financial securities
43
mortgage bonds secured by
real property
44
debentures bonds secured by what
nothing, is unsecured
45
notes are secured how
unsecured debt with original maturity less than 10 years
46
which bond ratings are considered high grade
Moody’s A a a and S&P A A A – capacity to pay is extremely strong.
Moody’s Aa and S&P A A – capacity to pay is very strong
47
which bond ratings are considered medium grade
Moody’s A and S&P A – capacity to pay is strong, but more susceptible to changes in circumstances.
Moody’s Baa and S&P B B B – capacity to pay is adequate, adverse conditions will have more impact on the firm’s ability to pay.
48
municipal securities are debt of who
state and local governments
49
municipal securities rated similar to what
corporate debt
50
interest rescievied from municipal securities is what
tax exempt at the federal level
51
treasury securities are whose debt
federal government
52
pure discount bonds are what
treasury bills
53
treasury notes and bonds are both what kind of debt
coupon
54
difference between treasury notes and bonds
notes mature in 1-10 years, bonds mature greater than 10 years
55
make no periodic interest payments, what kind of bond
zero coupon bond
56
Coupon rate floats depending on some index value.
what kind of bond
floating rate bond
57
examples of floating rate bond
adjustable rate mortgages and inflation-linked Treasuries.
58
describe price risk with floating rate bonds
less price risk,
59
order of treasury quotations,
date of maturity, coupon, bid, asked, change, asked yield
60
clean price is called what
quoted bond prices
61
dirty price is called what
invoice price , price actually paid
62
Interest earned since last coupon payment is owed to bond seller at time of sale.
accrued interest
63
defines the relationship between real rates, nominal rates and Inflation.
fisher effect
64
fisher effect equation
(1+R) = (1+r)(1+h)
65
fisher effect variables and meaning
R = Nominal rate (Quoted rate).
r = Real rate.
h = Expected inflation rate
66
The relationship between time to maturity and yields, all else equal
term structure
67
If you own a share of stock, you can receive cash in two ways.
what are they
The company pays dividends.
You sell your shares, either to another investor in the market or back to the company.
68
dividends are what kind of income
cash income
69
selling stock is what kind of income, what is holding period
capital gains, a year and a day
70
Suppose you are thinking of purchasing the stock of Moore Oil, incorporated.
You expect it to pay a $2 dividend in one year.
You believe you can sell the stock for $14 at that time.
You require a return of 20 percent on investments of this risk.
What is the maximum you would be willing to pay?
16/1.2
71
the price of the stock is really just ...
the present value of all expected future dividends.
72
Firm will pay a constant dividend forever what kind of dividend
constant dividend
73
Firm will increase the dividend by a constant percent every period.
what kind of dividend
constant dividend growth
74
Dividend growth is not consistent initially, but settles down to constant growth eventually.
what kind of divident
supernormal growth
75
dividend growth calculating of current price
= D1/(R-g)
76
DGM rearranged to solve for R
R = (D1/Po) + g
77
If the dividend is constant and equal to D, then the price can be written as
Po = D/R
78
If the dividend grows at a steady rate g, then the price can be written as
Po = D1/(r-g)
79
If the dividend grows steadily after t periods, then the price can be written as:
Pt = (Dt x (1+g))/(R-g)
80
For stocks that don’t pay dividends (or have erratic dividend growth rates), we can value them using the
PE x earnings per share or benchmark price - sales ratio x sales per share
81
features of common stock
voting rights, stockholder elect directions, cumulative voting,
different classes of stock (founders share, class A and B shares)
share proportionally in declared dividends, share proportionally in remaining assets during liquidation
right of first refusal to buy new stock issue to maintain proportional ownership if desired
82
are dividends tax deductible for the firm
no
83
for preferred stock holders, how do dividends work
must be paid before dividends can be paid to common stockholders, not a liability of the firm
84
does preferred stock holders have voting rights
generally no
85
dealer vs broker
“dealer = I’m selling my own stuff”
Think “broker = I’m helping you buy/sell yours”
86
decision rules that are okay to use
NPV criteria, IRR criteria, profitability criteria, MIRR
87
decision rules not okay to use
payback period, accounting rate of return
88
describe mutually exclusive
if I do this, I cannot do that
89
describe indépendant projects
if I did this, I can also do that
90
on a mutually exclusive project, what should you do with NPV
take the highest NPV project as long at It is greater than or equal to zero
91
on a independent project, what should you do with NPV
accept all projects with an NPV of greater than or equal to zero
92
what is conventional cash flow
negative to start, becomes positive
93
what is non conventional cash flow
negative to positive to negative to positive etc cash flow
94
If all NPV are negative, what should you do
nothing
95
what is capital budgeting
analysis of potential projects, long term decisions, large expenditures, impossible to reverse
96
an NPV of greater than zero means what
Project is expected to add value to the firm.
Will increase the wealth of the owners
97
most important alternative to NPV
internal rate of return
98
IRR = what
discount rate that makes the N P V = 0
99
decision rule for IRR
Accept the project if the I R R is greater than the required return
100
for IRR calc, which cash flows need to be included
all of them
101
IRR cannot rank what kind of projects
mutually exclusive
102
103
for IRR and independent projects, what should I do
adopt if IRR is greater than or equal to the required ROR
104
if a project is mutually exclusive for IRR, what should I do
I need more info to decide
105
BCOR 340
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