FM chapter 7

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FM chapter 7
2010-11-04 02:47:36

chapter 7
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  1. bonds
    type of debt or long term promissory note, issued by a borrower, promising to its holder a predetermined and fixed amount of interest per year and replayment of principal @ maturity
  2. debentures
    unsecure long term debt; for bondholders tehre are more risky than secure bonds and provide a more higher yield than secure
  3. subordinated debenture
    hierarchy of payout in case of insolvency
  4. mortgage bond
    secured by alien on real propery, value of real property is greater than that of the bonds issued
  5. Eurobonds
    securities (bonds) issued in a country different from one in whose currency the bond is denominated
  6. convertible bonds
    debt securities that can be converted into a firm's stock at a pre-specified price
  7. seniority in claims
    in case of insolvency, claims of debt, including bonds are honored before those of common or preferred stock
  8. par value
    face value of the bond returned to the bondholder at maturity
  9. coupon interest rate
    % of the par value of the bond that will be paid periodically in the form of interest
  10. maturity
    length of time until the bond issuer returns the par value to the bondholder and terminates or redeems the bond
  11. call provision
    if it exists on a bond; gives corporation the option to redeem the bonds before the maturity date
  12. indentured
    the legal agreement between the firm issuing the bond and the trustee who represents teh bondholder; protect the status of bonds from being weakend by managerial actions or by other security holders
  13. bond ratings
    reflects the future risk potential of the bonds
  14. lower bond ratings indicate
    higher probability of default
  15. junk bonds
    high-risk bonds with ratings of BB or below; aka high-yield bonds b/c pay high interest rate, 3-5% more than AAA rated bonds
  16. book value
    value of an asset as show on a firm's balance sheet
  17. Liquidation value
    dollar sum that could be realized if an asset were sold individually and not as part of a going concern
  18. market value
    observed value for an asset in the marketplace
  19. intrinsic or economic value
    fair value- present value of the asset's expected futrue cash flows
  20. in an efficient market the values of all securities
    at any instant fully reflect all available public info
  21. if markets are efficient then
    market value and intrinsic value will be the same
  22. value is determined by (3)
    • -amount and timing of the asset's expected future cash flows
    • -riskiness of CF
    • -Investors ROR for undertaking investment
  23. yield to maturity (YTM)
    discount rate that equates the present value of the cash flows with the current market price of the bond
  24. discount bonds
    market value of bond is below par when the investor's RR is > coupon interest rate
  25. premium bonds
    market value of bond is above par/face value when the investor's RR < coupon interest rate
  26. trade at par
    bonds will trade @ par: if investor's required rate of return is = coupon interest rate
  27. 3 main risks for bondholders
    • changes in current interest rates (interest rrates rise, market value of bonds fall
    • default risk (no or partial payment on debt as in bankruptcy cases)
    • call risk (bonds called before maturity date)