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Ma. Veronica C.

Buban
BSA I-29
Prof. Amy Marty

Define the following:


Indenture
An agreement declaring the benefits and obligations of two or more parties, often
applicable in the context of Bankruptcy and bond trading.

Debenture Bond

An unsecured bond whose holder has the claim of a general creditor on all assets of
the issuer not pledged specifically tosecure other debt. Compare subordinated debenture
bond and collateral trust bonds.

Senior Mortgage
A mortgage that is secured by a lien on a property and that has preference to
another mortgage on the same property. In general, the senior mortgage is the original
mortgage; one takes out a junior mortgage to pay for home repairs or for other
reasons. In the event of default or bankruptcy, the senior mortgage must be paid
entirely before the junior mortgage is paid at all. As a result, a senior mortgage carries
a lower interest rate than a junior mortgage. See also: Piggyback mortgage.

Junior Mortgage
A mortgage that will be satisfied only after more senior mortgages have been
satisfied. E.g., a first mortgage will be satisfied prior to a second or a third mortgage.

Bond Discount
The difference by which a bond's market price is lower than its face value. The
antithesis of a bond premium, which prevails when the market price of a bond is higher
than its face value. See: Original issue discount.

Sinking Fund
A fund to which money is added on a regular basis that is used to
ensure investor confidence that promised payments will be made and that is used
to redeem debt securities or preferred stock issues.

Refunding
Redeeming a bond with proceeds received from issuing lowercost debt obligations with ranking equal to or superior to the debt to be redeemed.

Risk Premium
The reward for holding the risky market portfolio rather than the risk-free asset.
The spread between Treasury and non-Treasury bonds of comparable maturity.

Coupon Equivalent Rate


An alternative method of calculating the yield on a bond. It is used for zerocoupon bonds, as these are issued atdiscounts to their face value; that is, the CER
states what the coupon rate would be if it carried a coupon and had beensold at face
value. As such, it gives a more accurate picture of the yield of a zero-coupon bond. It is
calculated as:
CER = ((Market Price - Face Value) / Market Price) * (365 / Days until Maturity).

Debt Limitation

A negative covenant in a bond indenture limiting the issuer's ability to acquire


more debt before the bond matures. Debt limitation may take a variety of forms. For
example, the indenture may restrict the debt service coverage ratio, meaning that the
company can acquire theoretically unlimited debt provided it increases it income to
such a level that it can service the debt. On the other hand, debt limitation may set a
maximum dollar amount of debt that the issuer may acquire during the life of the
bond, or even may prevent the issuer from becoming any more indebted at all. These
latter debt limitations are more likely when the issuer is not on sound financial footing
and possibly is issuing junk bonds. A debt limitation should not be confused with a debt
limit, which is similar but is a legal requirement on a government.

Callable Bond
A bond that may be redeemed before maturity. Callability allows the bond to be
called at the discretion of the issuerwithin certain limits. When the bond is called,
the bondholder receives the par value (or sometimes a bit more) and does not receive
any more coupons. Callable bonds are issued to allow the issuers
to hedge against interest rate risk. That is, if interest rates fall significantly, the issuer
can call the bond and issue a new bond at a lower interest rate, reducing its liabilities.
However, to protect the bondholder, most callable bonds also include call
protection which prevents the bonds from being called for a certain period of time and
thereby guarantees the current interest rate for that time.

Common Stock
Securities that represent equity ownership in a company. Common shares let
an investor vote on such matters as the election of directors. They also give the holder
a share in a company's profits via dividend payments or the capital appreciation of
the security. Units of ownership of a public corporation with junior status to the claims
of secured/unsecured creditors, bondholders and preferred shareholders in the event
of liquidation.

Preferred Stock
A security that shows ownership in a corporation and gives the holder a claim,
prior to the claim of common stockholders, on earnings and also generally on assets in
the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to
the common stock dividend, stated in a dollar amount or as a percentage of par value.
This stock does not usually carry voting rights. Preferred stock has characteristics of
both common stock and debt.

Cumulative Preferred Stock


Preferred stock whose dividends accrue, should the issuer not make
timely dividend payments.

Noncumulative Preferred Stock


Preferred stock whose holders must forgo dividend payments when
the company misses a dividend payment.

Stock Option
An option whose underlying asset is the common stock of a corporation.

Stock Split
Occurs when a firm issues new shares of stock and in turn lowers the
current market price of its stock to a level that is proportionate to pre-split prices.

Preemptive Right
Common stockholders' right to anything of value distributed by the company.

Treasury Shares
Shares issued in the name of the corporation. The shares are considered issued,
but not outstanding. Usually refers to stock that was once traded in the market but has
since been repurchased by the corporation. Treasury stock not considered when
calculating dividends or earnings per share.

Reverse Stock Split


A proportionate decrease in the number of shares, but not the total value
of shares of stock held by shareholders. Shareholders maintain the same percentage
of equity as before the split. For example, a 1-for-3 split would result in
stockholders owning one share for every three shares owned before the split. After the
reverse split, the firm's stock price is, in this example, three times the pre-reverse split
price. A firm generally institutes a reverse split to boost its stock's market price. Some
think this supposedly attracts investors.

Participating Preferred Stock


Preferred stock that provides the holder with a specified dividend plus the right
to additional earnings under specified conditions.

Stock Purchase Plan


A plan allowing employees of a company to purchase shares of the company,
often at a discount or with matching employer funds.

Vertical Integration
A business strategy in which a company expands its operations to offer similar
goods and services at a different point on the supply chain. For example, a
widget wholesaler may expand into retailing widgets directly with consumers. More
concretely, an oil exploration company may also begin refining oil in addition to its
exploration operations. Vertical integration always occurs at different points on the
supply chain: a retailer does not expand into retailing other products. Rather, it may
move into wholesaling.

Horizontal Integration

A business strategy in which a company expands its operations to provide similar


goods and services at the same point on the supply chain. For example, a widget
retailer may begin selling what sits in addition to widgets. More concretely, an oil
exploration company may also begin exploring for natural gas. It is important to note
that horizontal integration always occurs at the same point on the supply chain: a
retailer does not move into wholesale and vice versa.

Leveraged Buyout
The acquisition of a publicly-traded company, often by a group of
private investors, that is financed with debt. Often, the acquirer in a LBO issues junk
bonds in order to raise the capital necessary for the acquisition. A leveraged buyout
allows a company to be taken over with little capital, but it can be a high risk endeavor.

Voluntary Insolvency
An insolvent debtor owing debts exceeding in amount in the sum of P1000,
may apply to be discharged from his debts and liabilities by petition to the RTC of the
province or city in which he has resided for 6 months next preceding the filing of the
petition

Involuntary Insolvency
An adjudication of insolvency may be made by the petition of 3 or more
creditors, residents of the Philippines, whose credits or demands accrued in the
Philippines, for the amount of which credits or demands are in the aggregate
of not less than P1000

Debt/equity ratio
Indicator of financial leverage. Compares assets provided by creditors to assets
provided by shareholders. Determined by dividing long-term debt by
common stockholder equity.

Receivership
In corporate bankruptcy, a situation in which a court or regulator appoints a
custodian to administer all assets and debts. This custodian is known as a receiver;
his/her duty is to pay off as many debts as possible as cheaply as possible. One
obvious way to do this is to liquidate the company, but this is not always done. The
receiver may restructure the company to put it on a path toward solvency.

Aggressive Financing Strategy


Involves solving permanent needs with debt that is short term. Permanent needs
are solved with debt that is long term. The firm will do the financing.

Conservative Investment Strategy

One where preserving capital and minimizing risk is of utmost concern. This
strategy invests in lower risk securities like money market and fixed income securities,
and blue chip and large cap equities rather than riskier securities in an attempt to
preserve a portfolios value. In addition to preserving capital, conservative investment
strategies also often look to generate current income.

Stretching Accounts Payables


A common way that some firms gain cheap financing. However, a firm can only
get away with it if they have an imbalance of power between them and the vendor.

Prime Rate or Prime Lending Rate


A term applied in many countries to reference an interest rate used by banks.
The term originally indicated the rate of interest at which banks lent to favored
customers, i.e., those with good credit, though this is no longer always the case. Some
variable interest rates may be expressed as a percentage above or below prime rate.

Effective Interest Rate


The interest rate on a loan or financial product restated from the nominal interest
rate as an interest rate with annual compound interest payable in arrears.

Floating Interest Rate


Refers to any type of debt instrument, such as a loan, bond, mortgage, or credit,
that does not have a fixed rate of interest over the life of the instrument.

Definition of Terms Feasibility Study

Feasibility Study
Feasibility Study is a systematic survey, analysis and evaluation of a project on
the basis of available statistics and forecasting to determine the viability of the plan
proposed.

Market Feasibility
It is concerned with the price and quantity of a product that will be bought or
produced at present and over a specified period in the future.

Managerial Feasibility
In a small business, authority & responsibility should be pinpointed as well as the
salary ranges. In a big corporation, lines of authority & responsibilities should be
clearly defined, competent employees should be hired and salary range should be
competitive. There should be effective policies in recruitment & training of personnel.

Commercial Feasibility
Commercial Feasibility refers to availability of raw material, skilled labor,
infrastructure, and other factors of production. A number of projects have run into
rough weather due to poor commercial viability.

Financial Feasibility

The study should cover the volume of capital requirements for all phases of the
operation; the cash flow; the projected sales & revenue; the projected fixed & variable
costs; projection of expected future income; the payback period of the investments.

Social & Economic Feasibility


This study should show the relevance of the project under study in relation to the
plans of the government in a particular region, the benefits that maybe derived directly
or indirectly by the community & other business establishments & the possible effects
on our national economy.

Technical Feasibility
The technical capability of the personnel as well as the capability of the available
technology should be considered.