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Bus 170 - Test #2


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The mathematics of finance whereby interest is earned over time by saving or investing money.
time value of money
Value of an investment or savings amount today or at the present time.
present value
Value of a savings amount or investment at a specified time in the future.
future value
Interest earned only on the principal of the initial investment.
simple interest
An arithmetic process whereby an inital value increases at a compound interest rate over time to reach a future value.
Interest earned on interest in addition to interest earned on the principal or investment.
compound interest
An arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value.
Used to approximate the time required for an investment to double in value.
Rule of 72
A series of equal payments that occur over a number of time periods.
Exists when equal payments occur at the end of each time period (also referred to as a deferred annuity)
ordinary annuity
Exists when equal periodic payments occur at the beginning of each time period.
annuity due
A loan repaid in equal payments over a specified time period.
amortized loan
A schedule of the breakdown of each payment between interest and principal, as well as the remaining balance after each payment.
loan amortization schedule
Determined by multiplying the interest rate charged per period by the number of periods in a year.
annual percentage rate (APR)
Measures the true interest rate when compounding occurs more frequently than once a year.
effective annual rate (EAR)
Claims against the income or assets of individuals, businesses, and governments.
financial assets
The issuer knows the names of the bondholders and the interest payments are sent directly to the bondholder.
registered bonds
Have coupons that are literally "clipped" and presented, like a check, to the bank for payment. The bond issuer does not know who is receiving the interest payments.
bearer bonds
Principal amount that the issuer is obligated to repay at maturity.
par value (face value)
Interest payments paid to the bondholders.
coupon payments
Contract that lists the various provisions and convenants of the loan arrangement.
trust indenture
Individual or organization that represents the bondholders to ensure the indenture's provisions are respected by the bond issuer.
Impose additional restrictions or duties on the firm.
Assess both the collateral underlying the bonds as well as the ability of the issuer to make timely payments of interest and principal.
bond ratings
Backed or secured by specifically pledged property of a firm (real estate, buildings, and other assets classified as real property)
mortgage bonds
Gives the bondholder a claim to specific "rolling stock" (movable assets) such as railroad cars or airplanes.
equipment trust certificate
Does not permit future bond issues to be secured by any of the assets pledged as security to it.
closed-end mortgage bond
Allows the same assets to be used as security in future issues.
open-end mortgage bond
Unsecured obligations that depend on the general credit strength of the corporation for their security.
debenture bonds
Claims of these bonds are subordinate or junior to the claims of the debenture holders.
subordinated debenture
Can be changed or converted, at the investor's option, into a specified issuer's common stock.
convertible bond
Number of shares into which a convertible bond can be converted.
conversion ratio
Stock price times the conversion ratio.
conversion value
Can be redeemed prior to maturity by the issuing firm.
callable bonds
Price paid to the investor for redemption prior to maturity, typically par value plus a call premium of one year's interest.
call price
Risk of having a bond called away and reinvesting the proceeds at a lower interest rate.
call risk
Specified period of time after the issue during which the bonds cannot be called.
call deferment period
Allow the investor to force the issuer to redeem the bonds prior to maturity.
putable bonds (retractable bonds)
Have their coupons reset every two or three years to reflect the current interest rate environment and any changes in the firm's creditworthiness. The investor can accept the new coupon rate or put the bonds back to the firm.
extenable notes
Requirement that the firm retire specific portions of the bond issue over time.
sinking fund
Dollar denominated bonds sold outside the US
Eurodollar bonds
Dollar denominated bonds issued in the US by a foreign issuer.
Yankee bonds
Generally denominate in US dollars and marketed globally.
global bonds
Financial capital supplied by the owners of a corporation.
corporate equity capital
Certificate showing an ownership claim of a specific company.
stock certificate
Allows stock to be held in the name of the brokerage house.
street name
Represents ownership shares in a corporation.
common stock
Stated value of a stock; accounting and legal concept bearing no relationship to a firm's stock price or book value.
par value
Equity security that has preference, or a senior claim, to the firm's earnings and assets over common stock.
preferred stock
Requires that before dividends on common stock are paid, preferred dividends must be paid not only for the current period but also for all previous periods in which preferred dividends were missed.
cumulative preferred stock
Makes no provision for the accumulation of past missed dividends.
noncumulative preferred stock
Give the corporation the right to return the prefered stock at its option.
callable preferred stock
Has special provision that makes it possible to convert it to common stock of the corporation, generally at the stockholder's option.
covertible preferred stock
Bond that is selling below par value.
discount bond
Bond that is selling in excess of its par value.
premium bond
Return on a bond if it is held to maturity.
yield to maturity (YTM)
The chance of nonpayment or delayed payment of interest or principal.
credit risk (default risk)
Fluctuating interest rates lead to varying asset prices. In the context of bonds, rising (falling) interest rates result in falling (rising) bond prices.
interest rate risk
Fluctuating interest rates cause coupon or interest payments to be reinvested at different interest rates over time.
reinvestment rate risk (rollover risk)
Actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.
political risk
Fluctuating exchange rates lead to varying levels of US dollar-denominated cash flows.
exchange rate risk
A means of estimating common stock prices by assuming constant dividend growth over time.
Gordon model (constant divident growth model)
Original issue market in which securities are intially sold.
primary market
Market in which securities are traded among investors.
secondary market
Initial sale of newly issued debt or equity to the public.
Initial sale of equity to the public.
initial public offering (IPO)
Assist corporations by raising money through the marketing of corporate securities to the securities markets.
investment bankers (underwriters)
Sale of securities to the investing public.
public offering
Sale of securities to a small group of private investors.
private placement
Detailed study of a corporation.
due diligence
Highly regulated document which details the issuer's operations and finances and must be provided to each buyer of a newly issued security.
Price at which the security is sold to the investors.
offer price
Difference between the offer price and the price paid by the investment bank.
Agreement by the investment banker to sell securities of the issuing corporation; assumes no risk for the possible failure of the flotation.
best-effort agreement
Allows firms to register security issues (both debt and equity) with the SEC, and have them available to sell for two year.
shelf registration
Announcements of securities offerings.
Group of several investment banking firms that participate in underwriting and distributing a security issue.
Period of time during which members of the syndicate may not sell the securities for less than the initial offering price.
Intervention of the syndicate to repurchase securities in order to maintain their price at the offer price.
market stabilization
Represents the difference between the aftermarket stock price and the offering price.
Comprised of direct costs, the spread, and underpricing.
flotation costs
One who assists in the trading process by buying or selling securities in the market for an investor.
Satisfies the investor's trades by buying and selling securities from its own inventory.
Protect the investor from fraudulent security offerings.
blue-sky laws
Act as agents to execute customer's orders for securities purchases and sales.
commission (house) brokers
Independent brokers who handle the commission brokers' overflow.
independent (floor) brokers
Buy and sell stocks for their own account.
registered traders
Assigned dealers who have the responsibility of making a market in an assigned security.
Price that the buyer is willing to pay for the security.
bid price
Price for which the owner is willing to sell the security.
ask price
Open order of an immediate purchase or sale at the best possible price.
market order
Maximum buying price (limit buy) or the minimum selling price (limit sell) specified by the investor.
limit order
Limit "book" in which the specialist keeps unexecuted limit orders.
central limit order book
Order to sell stock at the market price when the price of the stock falls to a specified level.
stop-loss order
Sale of securities that the seller does not own.
short sale
An investor's securities are kept in the name of the brokerage house to facilitate record keeping, settlement, safety against loss or theft, and so on.
street name
Investor borrows money and invests it along with his own funds in securities.
buying on margin
Minimum percentage of the purchase price that must represent the investor's equity or unborrowed funds.
Investor faces the option of either closing the position or investing additional cash to increase the position's equity or margin.
margin call
Initial equity percentage.
initial margin
Minimum margin to which an investment may fall before a margin call will be placed.
maintenance margin
Sale or purchase of 100 shares.
round lot
Sale or purchase of less than 100 shares.
odd lot
Technique for trading stocks as a group rather than individually, defined as a minimum of at least 15 different stocks with a minimum value of $1 million.
program trading
Market for large blocks of listed stocks that operates outside the confines of the organized exchanges.
third market
Large institutional investors arrange the purchase and sale of securities among themselves without the benefit of broker or dealer.
fourth market
Receipt that represents foreign shares to US investors.
American depository receipt (ADR)
Listed on the London Stock Exchange; facilitates trading in foreign shares.
global depository receipt (GDR)

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