Finance 201

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Author:
britrene7
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205292
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Finance 201
Updated:
2013-03-06 00:11:31
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finance
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chapter 4,5,6
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  1. interest rate risk
    the chance of a capital loss due to interest rate fluctuations
  2. Reinvestment rate risk
    the chance the FUTURE interest payments will have to be in reinvested at a lower interest rate
  3. discount bond
    a bond selling for lower than its par value
  4. Zero coupon bond
    • no interest payments
    • generally sells at a deep discount and that pays the par value at the maturity due
  5. Assest-backed securities
    debt securities whose payments originate from other loans, such as credit cards, auto loans
  6. Premium bond
    a bond selling for greater than its par value
  7. agency bonds
    bonds issued by US goverment agencies
  8. Mortgage-backed securities
    debt securities whose interest and par value payments originate from real estate mortgage payments
  9. bond price
    current price that the bond sells for in the bond markets
  10. TIPS
    (treasury-inflation protected securities)
    US goverment bond the par value of which changes with inflation
  11. call premium
    the amount in addition to the par values paid by the issuer when calling a bond
  12. coupon rate
    the annual amount of interest paid expressed as a percentage of the bonds par value
  13. Term structure of interest rates
    a comparison of market yields on securities assuming all characteristics expect maturity are the same
  14. Current Yield
    Return from interest payments

    • Annual interest payment /DIVIDED/
    • current bond price
  15. Time to Maturity
    The length of time in years until the bond matures and the issuer repays the bond value
  16. call
    the issuer redeeming the bond before the scheduled maturity date
  17. Maturity date
    the calender date on which the bond principal comes due
  18. par value
    the amount of debt borrowed to be repaid face value
  19. principal
    the face amount, or par value, of debt
  20. indenture agreement
    legal contract describing the bond characteristics and the bondholder and issuer rights
  21. bond
    publicy traded debt
  22. fixed income securities
    any securities that make fixed payments
  23. amortized loan
    loan in which the borrower pays interest and principal over time
  24. loan principal
    the balance yet to be paid on a loan
  25. EAR
    effective annual rate

    • interest rate 
    •     reflects annualizing with componding figured in
  26. APR
    Annual precentage rate

    interest rate per period X(times) number of pds a yr
  27. console
    investment assets structured as perpetuities
  28. perpetiuties
    annunity with cash flows that continue forever
  29. annuity
    stream of level and fregent cash flows paid at the END of each period

    also called an ordinary annuity
  30. Annuity due
    an annuity in which cash flows are paid at the BEGINNING of each time period
  31. Discounting
    the process of finding PV by using the discount interest rate
  32. discount rate
    the interest rate used to discount future cash flows to the present
  33. compounding
    adding interest earned every period on the original investment and the reinvested amount
  34. simple interest
    interest earned on only the original deposit
  35. Present Value
    THe value amount a future cash flow is worth today
  36. Future value
    the value amount of a cash flow is worth in one or more periods
  37. Mortgage bonds
    bonds secured with real estate as collateral
  38. equipment trust cerificates
    bonds secured with factory and equip as collateral
  39. debenture
    unsecured bonds
  40. senior bonds
    older bonds that carry a higher claim to the issuers assets
  41. junk bonds
    low credit quality corporate bonds

    also called speculative bonds or high yield bonds
  42. unsecured corporate bonds
    corporate debt not secured by collateral such as land, building, or equip
  43. bond rating
    a grade of credit quality
  44. investment grade
    high credit quality corporate bonds
  45. Taxable equivalent yield
    modification of the municipal bonds yield to maturity used to compare muni bond yields to taxable bond yields
  46. credit quality risk
    the chance that the issuer will not make timely interset payments or even default
  47. yield to maturity
    the total return the bond offers if purchased at the current price and held to maturity
  48. Yield to call
    the total return that the bond offers if purchased at the current prices and held until called
  49. cash inflow
    positive #
  50. cash outflow
    negative #
  51. compound interest tool for building wealth
  52. interest grows exponentially

    small change in interest rate causes the future value to change dramatically
  53. discounting with multiple rates
    2500/ (1.07*1.08*1.07)
  54. rule of 72
    how many years it takes to DOUBLE an investment

    72/interest rate
  55. annuities
    level cash flows
  56. Perpetuities Examples
    preferred stock
  57. future value of an annuity due
    payments occur one period sooner
  58. present value of an annuity due
    discount by one less period
  59. amortized loan

    divide interest and multiply years by months to calculate monthly payments
    • ex
    • 4yrs = 4X12= 48 months
    • 9% = 9/12= 0.75% a month
    • loan amount = 10,000 (PV)
  60. amortized loans are characterized by level payments
  61. The US bond market is over twice the size of the US stock market
  62. bonds are less risky than stocks
  63. Bonds are DEBT obligations

    also known as fixed-income securities
  64. bond is a loan that requires regular interest payments and repayment of the borrowed principal
  65. call feature
    allows the issuing firm to refinance when interest rates fall
  66. coupon rate
    bonds interest rate
  67. when first issued bonds sell at par value
  68. Three primary types of bonds
    • US Treasury bonds
    • Corporate bonds
    • Municipal bonds
  69. US treasury bonds
    backed by the full faith and credit of the US government

    safest investments in the world
  70. maturities differ
    • less than one yr = treasury bills
    • one to ten yrs = treasury notes
    • ten yrs or more = treasury bonds
  71. corporate bonds
    used by corporations to raise captial

    • debt = bonds
    • equity =stock
  72. Municipal bonds
    issued by state and local governments
  73. TIPS
    treasury inflation protected securities
    • first issued in 1997
    • have fixed coupon rates
  74. corporate bonds are riskier than treasuries and have a higher return
  75. Coupon rate factors:
    • 1) the amount of uncertainity of company to make payment
    • 2) the term of the loan
    • 3) the level of interest rates in the overall economy
  76. municipal bonds have a par value of 5,000
  77. bonds are easier to value than stocks

    they know the time remaining to maturity
  78. zero coupon bond
    has no interest payments
  79. a bonds interest payments and par value are fixed
  80. short term bonds are less affected by interest rate risk than long-term
  81. to find the paments in coupons
    • 7% semiannual coupons
    • 7/2 = 3.5/100
    • .035(decimal)*1000 =35 payments
  82. CURRENT YIELD
    annual coupon/bond price
  83. YIELD TO MATURITY
    measures the total return to bondholder

    trying to find I/YR
  84. have to times yield to maturity by 2 for a full year
  85. bonds at discount = greater yield to maturity
  86. bonds at premium = greater coupon that maturity
  87. callable bonds are an advantage for the issuer

    disadvantage for the investor
  88. YIELD TO CALL
    multiply interest rate by 2 for a full year
  89. Municipal bonds offer lower yields
  90. equivalent taxable yield = muni yield/1-taxrate
  91. BB are considered junk or high yield bonds

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