Principles Of Finance Folien at University Of Malta | Flashcards & Summaries

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Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

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TESTE DEIN WISSEN

less liquidity and less emphasis on capital appreciation 

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TESTE DEIN WISSEN

Explain the purpose of bond ratings. Should you invest in a bond based only on its credit rating?

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TESTE DEIN WISSEN

The lower the rating we go the higher the probability that the bond will default i.e. the higher the risk. Bond ratings are expressed as letter ranging from ‘AAA’, which is the highest grade, to ‘C’ (junk), which is the lowest grade. Different rating services use the same letter grades, but use various

combinations of upper and lower case letters to differentiate themselves.


To illustrate the bond ratings and their meaning, we’ll use the Standard & Poor’s format:

  • AAA and AA: High credit-quality investment grade
  • AA and BBB: Medium credit-quality investment grade
  • BB, B, CCC, CC, C: Low credit-quality (non-investment grade) or “junk bonds”
  • D: Bonds in default for non-payment of principle and/or interest
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A primary motivation for investment in commodities is most likely the:

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positive correlation of commodities with unexpected inflation.

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The adjustments to cash flow from operations necessary to obtain free cash flow to the firm (FCFF) are:

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add non cash charges, subtract fixed capital investment, and subtract working capital investment

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Maturity

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The date on which the borrower will repay the par value

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Indexed Bond

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TESTE DEIN WISSEN

A bond which interest fluctuates according to a general level of inflation

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Par Value

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TESTE DEIN WISSEN

Face value, the amount promised to be repaid on maturity

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Original Issue Discount Bond (OID)

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TESTE DEIN WISSEN

Any bond originally offered at a price below its par value

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Coupon payment

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TESTE DEIN WISSEN

The monetary value of interest paid each period

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Call Provisions

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TESTE DEIN WISSEN

A provision in a bond contract that gives the right to the issuer of the bond to redeem such bonds under specified terms prior to the normal maturity date

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Putable Bonds

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TESTE DEIN WISSEN

Carry an option by the holder to sell back the bond and receive a predetermined price

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TESTE DEIN WISSEN

Floating Rate Note

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TESTE DEIN WISSEN

A bond which interest fluctuates according to a general level of interest rate

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Q:

Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

A:

less liquidity and less emphasis on capital appreciation 

Q:

Explain the purpose of bond ratings. Should you invest in a bond based only on its credit rating?

A:

The lower the rating we go the higher the probability that the bond will default i.e. the higher the risk. Bond ratings are expressed as letter ranging from ‘AAA’, which is the highest grade, to ‘C’ (junk), which is the lowest grade. Different rating services use the same letter grades, but use various

combinations of upper and lower case letters to differentiate themselves.


To illustrate the bond ratings and their meaning, we’ll use the Standard & Poor’s format:

  • AAA and AA: High credit-quality investment grade
  • AA and BBB: Medium credit-quality investment grade
  • BB, B, CCC, CC, C: Low credit-quality (non-investment grade) or “junk bonds”
  • D: Bonds in default for non-payment of principle and/or interest
Q:

A primary motivation for investment in commodities is most likely the:

A:

positive correlation of commodities with unexpected inflation.

Q:

The adjustments to cash flow from operations necessary to obtain free cash flow to the firm (FCFF) are:

A:

add non cash charges, subtract fixed capital investment, and subtract working capital investment

Q:

Maturity

A:

The date on which the borrower will repay the par value

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Q:

Indexed Bond

A:

A bond which interest fluctuates according to a general level of inflation

Q:

Par Value

A:

Face value, the amount promised to be repaid on maturity

Q:

Original Issue Discount Bond (OID)

A:

Any bond originally offered at a price below its par value

Q:

Coupon payment

A:

The monetary value of interest paid each period

Q:

Call Provisions

A:

A provision in a bond contract that gives the right to the issuer of the bond to redeem such bonds under specified terms prior to the normal maturity date

Q:

Putable Bonds

A:

Carry an option by the holder to sell back the bond and receive a predetermined price

Q:

Floating Rate Note

A:

A bond which interest fluctuates according to a general level of interest rate

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