Finance 320F Exam 1 - REVIEWER PDF

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Finance 320F Exam 1 Terms in this set (154)

financial instrument

3 types of financial instruments

debt

principal

is a particular type of debt or equity that a company issues in order to raise money

debts (like loans and bonds), equities (as in stock) and derivatives (like stock options)

borrowed money that must be repaid

the amount that must be repaid by the end of the term. The principal is also called the maturity value, par value, and/or face value.

interest rate

the borrower's cost of the debt

coupon rate

interest rate on bonds

discount rate and risk-free rate (Rrf)

interest rate on T-bills

maturity date

when principal must be repaid

equals the par value of the bond, M, times the annual coupon rate, C, then divided by the number of payments per year, m. INT = (M × C) ÷ m. Almost all interest payment with bonds (INT)

US corporate bonds pay coupon interest payments semi-annually; so in our class, m (for bonds) will always be 2. Almost all US corporate bonds have a face value of $1,000; so in our class, M will always be $1,000.

debt holders have priority over equity holders. Employees and customers are who has priority in liquidation?

paid first, followed by the government, debt holders (aka creditors/lenders/debt investors), and equity holders (aka owners/equity investors/stock holders).

debt holders

do not have voting rights, but can exert some influence through bond indentures or loan contracts

US Treasury bills, notes and bonds. These are considered to be default-free instruments. Since the federal government can simply borrow new money to federal debt includes

pay its debts, it has never defaulted on its debt. As a result, we assume the federal government will never default. Thus, the Default Risk Premium (DRP) on a Treasury instrument is always 0%.

state and local government debt includes Finance 320F Exam 1

revenue-generating municipal bonds and general obligation municipal bonds (both are referred to as "munis").

Revenue-generating bonds are repaid with

general obligation bonds are repaid with

revenue generated by the project that the bond financed

property tax dollars...