Duration
Compares the impact of interest rate changes on a bond. How many percentage points the price of a bond will go up/down if interest rates go down/up. Multiply decimal interest x percentage.
Inverse Price Relationship
When interest rates drop, bond rates go up. When interest rates ris...
WGU C214 Finance (Ch 1-15)
Duration - Answer Compares the impact of interest rate changes on a bond. How many
percentage points the price of a bond will go up/down if interest rates go down/up.
Multiply decimal interest x percentage.
Inverse Price Relationship - Answer When interest rates drop, bond rates go up. When
interest rates rise, bond rates go down.
Sensitivity - Answer How sensitive a bond is to fluctuating interest rates (calculated with
duration)
Debenture - Answer Bond that has no collateral
Par Value - Answer Face value of a bond (usually 1k)
Coupon Rate - Answer Interest rate of the bond, payable in installments. Cannot be
changed for the life of the bond.
Yield to Maturity - Answer rate of return on a bond
Affirmative covenants - Answer things firm promises to do
negative covenants - Answer things firm promises to not do
current yield of a bond - Answer coupon payment divided by bond amount. NOT the
same as YTM.
Subordinated debenture - Answer debentures that take last place in a payoff
Zeros - Answer bonds that pay no coupon, but sell at a lower price.
Eurobond - Answer Pays out in a non-domestic currency (US bond in europe that pays
in dollars)
Foreign Bond - Answer Bond floated by another country but that is payable in the
domestic currency (chinese debt payable in dollars floated in the us)
Muni-bonds - Answer floated by local govts to fund infrastructure, exempt from taxes.
Convertible bonds - Answer can be converted into equity securities.
Junk Bonds - Answer bond that is rated BB or below. higher yield and higher risk.
, Primary Factors influencing bond sensitivity - Answer Coupon rate, time to maturity
(primary factor).
Primary financial instruments - Answer stocks and bonds
Syndicate - Answer Group that is formed to handle a stock or bond issue. Made up of
large investment banks or investors. They may also underwrite.
Competitive Sale - Answer underwriters will submit bids, firm will select lowest interest
rate, highest price.
Negotiated sale - Answer Firm will investigate underwriter bids and will negotiate after
more investigation.
Secondary Markets - Answer Where stocks are traded after IPO. "the stock market"
Auction financial Market - Answer Has a physical location. NYSE. Uses specialists.
Dealer (stock) market - Answer does not require a physical location. Uses a network of
dealers. NASDAQ.
Specialist - Answer provides liquidity in the stock market (NYSE) and sets the spread.
ASK Price - Answer Minimum price sellers are willing to sell for
BID price - Answer the maximum price buyers are willing to 'bid'/Pay
Market Order - Answer executes at the market price
Limit Order - Answer executes at the price requested, if available.
Calculating a simple stock dollar return - Answer Price (new) - Price (old) + div or
coupon
Calculating a simple stock percentage return - Answer {Price (new) - Price old +DIV}/
Price old+ X 100
Agency Costs - Answer Costs that are incurred when management does not act in the
best interest of shareholders.
Indirect method starts with... - Answer Net income!
Formula for CFO - Answer NI+Depreciation expense + changes in operating accounts
Increase in an asset account means.. - Answer cash has left the firm. Considered an
outflow, decrease in cash on a cash flow statement.
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