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- StudyBlue
- Minnesota
- University of Minnesota - Duluth
- Business Administration
- Business Administration 1
- Lala
- Test 2 Corp Finance

Ashley P.

future value

the amount an investment is worth after one or more periods

compounding

the process of accumulating interest on an investment over time to earn more interest

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compounded interest

interest earned on both the initial principal and the interest reinvested from prior periods

simple interest

interest earned only on the original principal amount invested

present value

the current value of future cash flows discounted at the appropriate discount rate

discount

calculate the present value of some future amount

discount rate

the rate used to calculate the present value of future cash flows

annuity

a level stream of cash flows for a fixed period of time

annuity due

an annuity for which the cash flows occur at the beginning of the period

perpetuity

an annuity in which the cash flows continue forever

stated interest rate

the interest rate expressed interest of the interest payment made each period.

effective annual rate (EAR)

the interest rate expressed as if it were compounded once per year

annual percentage rate (APR)

the interest rate charged per period multiplied by the number of periods per year

coupon

the stated interest payment made on a bond

face value

the principal amount of a bond that is repaid at the end of the term

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coupon rate

the annual coupon divided by the face value of a bond

maturity

the specified date on which the principal amount of a bond is paid

yield to maturity (YTM)

the rate required in the market on a bond

current yield

a bond's annual coupon divided by its price

indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue

bearer form

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 bond

note

an unsecured debt, usually with a maturity under 10 years

sinking fund

an account managed by the bond trustee for early bond redemption

bid price

the price a dealer is willing to pay for a security

asked price

the price a dealer is willing to take for a security

real rates

interest rates or rates of return that have been adjusted for inflation

nominal rates

interest rates or rates of return that have not been adjusted for inflation

Fisher Effect

the relationship between nominal returns, real returns, and inflation

dividend yield

a stocks expected cash dividend/ current price

capital gains yield

dividend growth rate, or the rate at which the value of an investment grows

common stock

equity without priority for dividends or in bankruptcy

proxy

grant or authority by a shareholder allowing another individual to vote his or her shares

preferred stock

stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

Future Value =

PV(1+r)^t

r= period interest rate

t= number of periods

for any given interest rate, the longer the time period, the ___ the PV

lower

for any given time period, the higher the interst rate, the ____ the PV

smaller

annuity

finite series of equal payments that occur at regular intervals

oridnary annuity

when the first payment occurs at the END of the period

annuity due

when the first payment occurs at the BEGINNING of the period

Perpetuity equation:

PV=C/r

growing perpetuity equation

PV= C/r-g

r= required reture

g= growth rate

Differences between debt and equity

not an ownership interest vs. ownership interest

not having voting rights vs. having voting rights

interest is a cost and tax deductable vs. dividends not a cost and not tax ded.

is a liability vs. not a liability

can go bankrupt vs. can't go bankrupt

bond indenture

contract between the company and the bondholders

Fisher Effect

(1+R)= (1+r)(1+h)

R= nominal rate

r= real rate

h= expected inflation rate

Dividend Growth Model

P0 = D1/R-g

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