BUSM 2002 Study Guide - Final Guide: Net Present Value, United States Treasury Security, Preferred Stock
Finance Final Study Guide
Chapter 6
Interest rates
Real rate is the rate that creates equilibrium between the supply of savings and the demand for
invest funds. The real rate changes with changing conditions
Nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid
by the demander. The difference between nominal and real is that nominal fluctuates with
inflation.
Nominal interest rate equation= r= r* + Rf (risk free rate) + RP (risk premium)
Rf= r* + IP
Treasury bills (t-bills) pure discount bonds, they have an original maturity of one year or less.
Make no periodic interest payments, YTM= PV-1,000 (FV)
Treasury notes have an original maturity between two and ten years
Treasury bonds, have an original maturity of over ten years
Risk free subtract quality-average
Municipal bonds, debt of state and local governments. Two types of municipal bonds: 1. GO
(paid off by tax revenue), and 2. Revenue (paid off by project revenue i.e. toll bridge)
To solve, yield*(1-tax bracket)
Bond structure is the legal document that specifies both the rights of the bondholders and the
duties of the issuing corporation.
Standard debt provisions are provisions in a bond indenture specifying certain record-keeping
and general business practices that the bond issuer must follow
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Restrictive covenants are provision in a bond indenture that place operating and financial
constraints on the borrower. They require a minimum level of liquidity to protect against loan
default, prohibit the sale of accounts receivable to generate cash, impose fixed-asset
restrictions, constrain subsequent borrowing.
Sinking fund requirements are a restrictive provision often included in a bond indenture that
retire bonds automatically before maturity.
Security interest is a provision in the bond indenture that identifies collateral pledged against
the bond, it keeps the bond safe.
A trustee is a paid individual/cooperation that acts as the third party to a bond indenture and
can take specified actions on behalf of bondholders if the terms of the indenture are violated.
A conversion feature for convertible bonds allows bondholders to change each bond into a
stated number of shares of common stock.
A call feature is a feature in all corporate bond issues and it gives the issuer the opportunity to
repurchase a bond at a stated call price prior to its maturity. Call price is the price that a bond
a e epuhased, all peiu is the aout hih the od’s all pie eeeds its par
value.
Chapter 7
Det iludes all of a fi’s ooed oe ad it is epaid aodig to a fied shedule of
payments
Euit osists of fuds poided the fi’s oes that ae epaid sujet ot a fi’s
performance.
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Document Summary
Real rate is the rate that creates equilibrium between the supply of savings and the demand for invest funds. Nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by the demander. The difference between nominal and real is that nominal fluctuates with inflation. Nominal interest rate equation= r= r* + rf (risk free rate) + rp (risk premium) Treasury bills (t-bills) pure discount bonds, they have an original maturity of one year or less. Make no periodic interest payments, ytm= pv-1,000 (fv) Treasury notes have an original maturity between two and ten years. Treasury bonds, have an original maturity of over ten years. Municipal bonds, debt of state and local governments. Go (paid off by tax revenue), and 2. Revenue (paid off by project revenue i. e. toll bridge) Bond structure is the legal document that specifies both the rights of the bondholders and the duties of the issuing corporation.
