Corporate Finance Test

Corporate Finance Test Coupon - Answer- The stated interest payment made on a bond. Face Value - Answer- The principle amount of a bond that is repaid at the end of the term. Also called par value. Coupon Rate - Answer- The annual coupon divided by the face value of a bond. Maturity - Answer- The specified date on which the principle amount of a bond is paid. Yield to Maturity (YTM) - Answer- The rate required in the market on a bond. Bond Value - Answer- Present Value of the coupons + Present value of the face amount Interest Rate Risk - Answer- The risk that arises for bond owners from fluctuating interest rates. -All other things being equal, the longer the time to maturity, the greater the interest rate risk -All other things being equal, the lower the coupon rate, the greater the interest rate risk Current Yield - Answer- A bond's annual coupon divided by its price. Differences Debt-Equity - Answer- 1. Debt is not an ownership interest in the firm. Creditors generally do not have voting power. 2. The corporation's payment of interest on debt is considered a cost of doing business and is fully tax deductible. Dividends paid to shareholders are not tax deductible. 3. Unpaid debt is a liability of the firm. If it is not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued. Indenture - Answer- The written agreement between the corporation and the lender detailing the terms of the debt issue. Registered Form - Answer- The form of bond issue in which the registrar of the company records ownership of each bond; payment is made directly to the owner of record. Bearer Form - Answer- The form of bond issue in which the bond is issued without record of the owner's name; payment is made to whomever holds the bonds. Debenture - Answer- An unsecured debt, usually with a maturity of 10 years or more. Note - Answer- An unsecured debt, usually with a maturity under 10 years. Sinking Fund - Answer- An account managed by the bond trustee for early bond redemption. Call Provision - Answer- An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity. Call Premium - Answer- The amount by which the call price exceeds the par value of a bond. Deferred Call Provision - Answer- A call provision prohibiting the company from redeeming a bond prior to a certain date. Call-protected Bond - Answer- A bond that, during a certain period, cannot be redeemed by the issuer. Protective Covenant - Answer- A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest. Can be negative or positive. Zero Coupon Bond - Answer- A bond that makes no coupon payments and is thus initially priced at a deep discount. Floating Rate Bond (Floater) - Answer- Have adjustable coupon rates. Income Bonds - Answer- Similar to conventional bonds except that coupon payments depend on company income. Convertible Bond - Answer- Can be swapped for a fixed number of shares of stock anytime before maturity. Put Bond - Answer- Allows the holder to force the issuer to buy back the bond at a stated price. Structured Note - Answer- Bonds that are based on stocks, bonds, commodities, or currencies. Bid Price - Answer- The price a dealer is willing to pay for a security. Asked Price - Answer- The price a dealer is willing to take for a security. Bid-ask Spread - Answer- The difference between the bid price and the asked price. Clean Price - Answer- The price of a bond net of accrued interest; this is the price that is typically quoted.