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CORPORATE FINANCE FINAL EXAM VERIFIED STUDY GUIDE #15
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CORPORATE FINANCE FINAL EXAM VERIFIED STUDYGUIDE #15
Value of a bond - correct answer PV of coupon payments & PV of the par value
Government Bonds - correct answer all backed by the full faith and credit of the US
govt. The US govt will take whatever steps they can to make the insurance payments
-Treasury Bills are issued at a pure discount & mature in less than or equal to one year
-Notes are coupon bonds w/ a maturity between 1-10 years
-Bonds are coupon bonds w/ a maturity of 10+ years
Agency Bonds - correct answer issued by govt entities but not backed by full faith and
credit. Ex. Minnie, GNMA, FNMA
Municipal Bonds - correct answer issued by state and local govts. Triple tax exempt-
attractive to investor
Inflation protected bonds (TIPS) - correct answer treasury inflation protected security
coupon rate adjusts with inflation
Corporate Bonds - correct answer issued by corporations and have higher default risk
Foreign Bonds - correct answer issued by foreign govt or corporation
Zero Coupon Bonds - correct answer coupon rate=0% and are issued at a discount
Interest Rate Risk - correct answer One of the risks of investing in bonds
-inverse relationship between interest rates and the price on existing bonds
Price Risk - correct answer relates to market value or market price. Higher for long
maturities & higher for low coupon
Reinvestment Risk - correct answer relates to income & is higher for short maturities &
higher for high coupons
Default Risk - correct answer credit risk
-the potential that the issuer does not pay
Tradeoff between risk & return - correct answer the greater the expected return, the
greater the risk
Historical Returns - correct answer Small stocks- 12%
Large stocks- 10%
Long term corp bonds- 7%
Long term govt bonds- 6%
Treasury bills- 3%
, Measuring Risk - correct answer 1. Total risk= systematic risk + unsystematic risk
-total risk measured by standard deviation
2. Diversify to reduce unsystematic risk (which also reduces total risk)
3. To maximize diversification benefits, select uncorrelated assets
Systematic Risk - correct answer market risk
-election, natural disaster, rising interest rates
-risks or impacts that could impact entire system
-measured by beta
Unsystematic Risk - correct answer firm specific risk
-risks that are particular to a firm
-change in leadership, change in CEO
Correlation Coefficient - correct answer measure of relationship between two things
-sign indicates direction
-number indicates magnitude
Measuring Return - correct answer CAPM: rs= rf + b (rm-rf)
DDM: rs= D1/Po + g
Only focus on systematic risk because unsystematic risk is diversified
Preferred Stocks - correct answer -gets paid first
-is a hybrid security
-has a par value & fixed dividend
-preferred stock is a perpetuity
-dividends can be skipped but must be paid before common dividends
-no voting rights
Common Stocks - correct answer -various voting rights, but most important is to elect
board of directors
-preemptive rights allow investors to purchase additional shares on a prorata basis.
They also prevent dilution of value
Value of a stock - correct answer
Market value vs. Intrinsic value - correct answer market value is a function of supply &
demand
Intrinsic value is an estimate of the true value of the stock
Purpose of a corporation - correct answer to maximize shareholder value
Capital Budgeting - correct answer summary of planned investments in long term assets
-which long term investments or projects should a firm select? Select if return exceeds
cost
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