Brief ch6

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  1. Debt
    Includes borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments
  2. Equity
    Funds provided by the firm's owners (investors or stockholders) that are repaid subject to the firm's performance.
  3. Par-Value Common Stock
    An arbitrary value established for legal purposes in the firm's corporate charter and which can be used to find the total number of shares outstanding by dividing it into the book value of common stock.
  4. Preemptive right
    Allows common stockholders to maintain their proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership.
  5. Dilution of ownership
    A reduction in each previous shareholder's fractional ownership resulting from the issuance of additional shares of common stock.
  6. Dilution of earnings
    a reduction in each previous shareholder's fractional claim on the firm's earnings resulting from the issuance of additional shares of common stock.
  7. Rights
    Financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.
  8. Authorized shares
    Shares of common stock that a firm's corporate charter allows it to issue.
  9. Outstanding Shares
    Issued shares of common stock held by investors, including both private and public investors.
  10. Issued Shares
    Shares of common stock that have been put into circulation; the sum of oustanding shares and treasury stock.
  11. Restrictive covenants
    Provisions in a bond indenture that place operating and financial constraints on the borrower.
  12. Subordination
    In a bond indenture, the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
  13. Trustee
    A paid individual, corporation, or commercial bank trust department that acts as the third party to a bond indenture and can take specified actions on behalf of the bondholders if the terms of the indenture are violated.
  14. Conversion Feature
    A feature of convertible bonds that allows bondholders to change each bond into a stated number of shares of common stock.
  15. Call feature
    A feature included in nearly all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated call price prior to maturity.
  16. Stock purchase warrants
    Instruments that give their holders the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time.
  17. Current Yield
    A measure of a bond's cash return for the year; calculated by dividing the bond's annual interest payment by its current price.
  18. Yield to Maturity (YTM)
    Compound annual rate of return earned on a debt security purchased on a given day and held to maturity.
  19. Interest rate risk
    The chance that interest rates will change and thereby change the required return and bond value. Rising rates, which result in decreasing bond values, are of greatest concern.
  20. Interest rate
    Usually applied to debt instruments such as bank loans or bonds; the compensation paid by the borrower of funds to the lender; from the borrower's point of view, the cost of borrowing funds.
  21. Term Structure of interest rates
    The relationship between the maturity and rate of return for bonds with similar levels of risk.
  22. Expectation Theory
    The theory that the yield curve reflects investor expectations about future interest rates; an expectation of rising interest rates results in an upward-sloping yield curve, and an expectation of declining rates results in a downward-sloping yield curve.
  23. Bond indenture
    A legal document that specifies both the rights of the bondholders and the duties of the issuing corporation.
  24. Corporate Bond
    A long-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms.
  25. Coupon Interest rate
    The percentage of a bond's par value that will be paid annually, typically in two equal semiannual payments, as interest.
  26. Sinking-Fund
    A restrictive provision often included in a bond indenture, providing for the systematic retirement of bonds prior to their maturity.
  27. Convertible Bonds
    An option that is included as part of a bond or a preferred stock issue and allows its holder to change the security into a stated number of shares of common stock.
  28. Discounting cash flows
    The process of finding present values; the inverse of compounding interest.
  29. Ordinary Annuity
    An annuity for which the cash flow occurs at the end of each period.
  30. Continuous compounding
    Compounding of interest an infinite number of times per year at intervals of microseconds
  31. Nominal interest rate
    The actual rate of interest charged by the supplier of funds and paid by the demander.
  32. Annual percentage rate
    The nominal annual rate of interest, found by multiplying the periodic rate by the number of periods in one year, that must be disclosed to consumers on credit cards and loans as a result of "truth-in-lending laws"
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Brief ch6
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