# finance exam 2

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1. real interest rate
the interest composed of a real interest rate plus the inflation rate
2. perpetuity
An infinite series of regular and equal payments
3. real interest rate
the reward for waiting
4. APR(annual percentage rate)
The yearly uncompounded rate of interest
5. Effective annual rate(EAR)
The compounded rate of interest per year.
6. Fisher effect
The relationship in which the nominal interest rate is a function of the real rate, inflation, and the product of the real rate of inflation.
the difference between the asking price and the bid price
8. bid price
the price at which an authorized stock dealer is willing to buy shares.
9. bull market
A prolonged period in which stock prices in general are rising.
10. bear market
A prolonged market period in which stock prices in general are decreasing.
11. amortization
the distribution of a payment into multiple cash flow installments(each repayment installment consists of both principle and interest)
12. amortization schedule
The listing of periodic interest expense, the reduction of principle each period, and the ending balance for each period.
13. what are the three payment methods?
• pay off all the principle and interest at maturity(discount loan)(not on test)
• make interest payments as you go and pay principle at the end(interest only loan)(not on test)
• pay equal payments of both interest and principle(amortized loan)
14. What are the ten important points about the tvm equation(1-5)
• 1. amounts of money can be added or subtracted only if they are at the same point in time
• 2. The timing and the amt of the cash flow are what matters
• 3.timelines are helpful
• 4.pv calculations discount all future cash flow back to current time
• 5. fv calculations value cash flow at a single point in time in the future.
15. What are the ten important points about the tvm equation(6-10)
• 6.annutiy is a series of equal cash payments over time
• 7. the tvm equation has four basic variables, but only one equation
• 8. three basic ways to repay a loan
• in some situations not all important data can be classified using the tvm calculation
16. fvifa(meaning)
future value of interest factor of an annuity
17. consol
stocks that pay interest forever, have no date of maturity, and make no promise to repay the principal.They are priced as perpetual bonds
18. principal
the original loan amount borrowed
19. annual percentage rate(apr)
the yearly rate earned by investing or charged for borrowing.
20. what does the variable m stand for
compounds per year(c/y)
21. Effective annual rate(EAR)
The rate of interest actually paid or earned per year and depends on the number of compounding periods.
22. how to calculate ear on ti83?
use eff function and (interest rate,#of compounds) and then enter
23. how to tell wheter to use pv or future value on the calculator?
When you are paying a loan the fv is always 0 and you are solving for pv. when collecting interest pv is usually 0 and fv is the variable you are solving for.
the portion of a borrowing rate that compensates the lender for higher risk associated with varying types of collateral.
25. risk free rate
a theoretical interest rate at which an investor is guaranteed to earn the subscribed rate at which the borrower will never default
that portion of the nominal interest rate that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive payment in full.
27. bond
A long term debt instrument by which a borrower of funds agrees to pay back the funds(the principal) with interest on specific dates in the future.
28. par value
the principal amount to be paid at the maturity of the bond
29. coupon rate
regular interest payment of the bond
30. coupon rate
the interest rate for coupons, expressed in annual terms and stated on the bond.
31. maturity date
the expiration date of the bond
32. yield to maturity
the return the bondholder receives on the bond if it is held to maturity.
33. current yield
The annual coupon payment divided by the current price
34. zero coupon bond
bond that has no coupon pmts
35. when do you use positive or negative for pmt's on a ti83?
negative pmt's for annuity calculations, and positive pmt's for bond calculations(coupon pmts go in there)
36. when the coupon rate is less than the yield to maturity, the bond sells for a_____against par value and is called a _____bond.
discount, discount
37. when the coupon rate is more than the yield to maturity, the bond sells for a________ above its par value, and is called a ______ bond.
38. when the yield to maturity is the same as the coupon rate, the bond sells for______ and is called a ______.
par value, par value bond
39. basis point
one hundredth of a percentage point(used in bond valuation)
40. fallen angels
bonds that fell from baa3 and downgraded to speculative bonds
41. characteristics of common stock(8)
• 1.ownership,
• 2. residual claim to assets(after everyone else)
• 3.vote for board members
• 4.no maturity date
• 5.authorized,issued,and outstanding shares
• 6.treasury stock
• 7.preemptive rights
• 8.dividends and their tax effect
42. how are dividends taxed?
not treated as an expense for the company, but are taxed by shareholders.
43. authorized shares
maximum number of shares the firm is allowed to issue
44. issued shares
the number of shares issued
45. treasury stock
shares kept by the company for future needs
46. preemptive right
allows current shareholders to buy a fixed percentage of all future issues before they are offered to the general public.
47. prospectus
a document that provides potential buyers with information about the company and the impending sale
48. due dilligence
to ensure that all relevant information is disclosed prior to the sale.
49. firm commitment approach
investment banker essentially buys the entire stock issue and then sells the issue for a higher price.
50. best efforts
the investment banker pledges his or her best effort to sell shares, and takes a small percentage of each stock.
51. what are the three largest secondary exchanges?
• nyse,
• american stock exchange(amex)
• the national association of securities dealers automated quotation system(nasdaq)