Quiz 2

Name: Sabbir Hossain

ID: 111 161 350

Chapter 6

Debt: Debt is an amount of money borrowed by one party from another. Debt is used by many
corporations and individuals as a method of making large purchases that they could not afford
under normal circumstances. A debt arrangement gives the borrowing party permission to borrow
money under the condition that it is to be paid back at a later date, usually with interest.

Short term debt: Short-term debt is called current liabilities, which is a firm's financial obligations
that are expected to be paid off within a year. Common types of short-term debt include short-term
bank loans, accounts payable, wages, lease payments, and income taxes payable. The most
common measure of short-term liquidity is the quick ratio which is integral in determining a
company's credit rating.

Long term debt: Long-term debt is debt that matures in more than one year and is often treated
differently from short-term debt. For an issuer, long-term debt is a liability that must be repaid
while owners of debt account for them as assets. Long-term debt liabilities are a key component
of business solvency ratios which are analyzed by stakeholders and rating agencies when assessing
solvency risk

Bond: Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
It is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate to
debtholders. Variable or floating interest rates are also now quite common. Bond prices are
inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa. It also
has maturity dates at which point the principal amount must be paid back in full or risk default.
Here is the type of bonds are:

• Fixed rate bonds.

• Government bonds.
• Corporate bonds.
• Mortgage bonds.
• Debenture bonds.
• Exchangeable bonds.
• Income bonds.
• Zero-coupon bonds.
• Junk bonds.

Sinking fund: A sinking fund is a type of fund that is created and set up purposely for repaying
debt. It helps companies that have floated debt in the form bonds gradually save money and avoid
a large lump-sum payment at maturity. Some bonds are issued with the attachment of a sinking
fund feature. The prospectus for a bond of this type will identify the dates that the issuer has the
option to redeem the bond early using the sinking fund. While the sinking fund helps companies
ensure they have enough funds set aside to pay off their debt, in some cases, they may also use the
funds to repurchase preferred shares or outstanding bonds. Call provision: A call provision is a
stipulation on the contract for a bond or other fixed-income instruments that allows the issuer to
repurchase and retire the debt security.
Premium fund: Premium funding enables businesses to pay their insurance premiums in easy to
manage monthly installments. As businesses are faced with increasing financial obligations, we
offer a flexible and convenient alternative to paying large insurance premium costs upfront.
Avoiding these large lump sum payments frees up business cash flow for use elsewhere.

Convertible feature: A convertible bond pays fixed-income interest payments but can be
converted into a predetermined number of common stock shares. The conversion from the bond to
stock happens at specific times during the bond's life and is usually at the discretion of the
bondholder. it offers investors a type of hybrid security that has features of a bond, such as interest
payments, while also having the option to own the underlying stock. Foreign debt: A foreign bond
is a bond issued in a domestic market by a foreign entity in the domestic market’s currency as a
means of raising capital.

Call price: The call price is the price a bond issuer or preferred stock issuer must pay investors if
it wants to buy back, or call, all or part of an issue before the maturity date. The amount at which
the holder of preferred stock or bonds must sell the stock or bonds back to the issuing corporation.
The call price is disclosed in the indenture. The call price might be the face or par amount plus one
year's interest or dividend.

Yield to maturity: Yield to maturity is the total return anticipated on a bond if the bond is held
until it matures. It considered a long-term bond yield but is expressed as an annual rate. In other
words, it is the internal rate of return of an investment in a bond if the investor holds the bond until
maturity, with all payments made as scheduled and reinvested at the same rate.
Chapter 7

Preferred stock: Preferred stockholders have a higher claim on distributions than common
stockholders. The stockholders usually have no or limited, voting rights in corporate governance.
In the event of a liquidation, preferred stockholders' claim on assets is greater than common
stockholders but less than bondholders. Preferred stock has characteristics of both bonds and
common stock which enhances its appeal to certain investors.

Common stock: Common stock is a form of corporate equity ownership. Holders of common
stock elect the board of directors and vote on corporate policies. It’s a long-term growth for the
investors. More dramatic movement. Common stock shareholders can vote to elect the directors
of the company. Types of common stock are giving bellow

• Founders share
• Closely held cooperation
• Publicly owned corporation

Par value: Par value is the face value of a bond. Par value is important for a bond or fixed-income
instrument because it determines its maturity value as well as the dollar value of coupon payments.

Cumulative dividends: A cumulative dividend is a required fixed distribution of earnings made

to shareholders. Preferred shares are the most common type of share class that provides the right
to receive cumulative dividends. If a company is unable to distribute dividends to shareholders in
the period owed, the dividends owed are carried forward until they are paid. Besides, the dividends
must be paid before common shareholders receive a dividend.
Maturity: In finance, maturity or maturity date is the date on which the final payment is due on a
loan or other financial instrument, such as a bond or term deposit, at which point the principal and
all remaining interest are due to be paid.

Convertibility: The quality that allows money or other financial instruments to be converted into
other liquid stores of value.

Conversation price: The conversion price is the price per share at which a convertible security,
such as corporate bonds or preferred shares, can be converted into common stock.

Some other provisions occasionally found in preferred stock include the following

• call provision
• sinking fund
• participating.

Dividends: Dividend is the distribution of a portion of the company's earnings, decided and
managed by the company’s board of directors, and paid to a class of its shareholders. Payments
made by publicly-listed companies as a reward to investors for putting their money into the
venture. Announcements of dividend payouts are generally accompanied by a proportional
increase or decrease in a company's stock price.

There are two kinds of dividends:

1. Income stocks.

2. Growth stocks.

Control of the firm: Control refers to having sufficient amount of voting shares of a company to
make all corporate decisions.
 • Proxy: A proxy is an agent legally authorized to act on behalf of another party or a format
that allows an investor to vote without being physically present at the meeting.
• Proxy fight: A proxy fight is the action of a group of shareholders joining forces, in a bid
to gather enough shareholder proxies to win a corporate vote.
• Takeover: A takeover occurs when one company makes a bid to assume control of or
acquire another, often by purchasing a majority stake in the target firm.

Preemptive rights: The preemptive right allows an early investor to maintain voting clout in a
company even if new shares are issued. This right can also protect the early investor from a loss if
the new shares are priced lower than the initial shares. Those rights are routinely offered only to
early investors and majority shareholders, not to all shareholders.

Foreign equity market: The trading of stocks issued in a certain country by a foreign publicly-
traded company s called the Foreign equity market.
Chapter 8
Risk: Risk is defined in financial terms as the chance that an outcome or investment's actual gains
will differ from an expected outcome or return. Risk includes the possibility of losing some or all
of the original investment. Return: return is the outcome of a profit or loss over the invest that is
made

There are two return:

• Historical Return
• Expected Return

There are two types of risks as well

• Stand Alone Risk

• Portfolio Risk

Standalone risk: Stand-alone risk is the risk associated with a single aspect of a company or a
specific asset. Stand-alone risk cannot be mitigated through diversification. Total beta gauges the
volatility of a specific asset on a stand-alone basis. The coefficient of variation is also a way to
measure stand-alone risk because it shows how much risk is associated with an investment relative
to the amount of expected return.

Portfolio risk: Portfolio risk is not the weighted average or average of the individual securities
risk rather it is highly influenced by the correlations among the securities included in the portfolio.

Beta: Beta is primarily used in the capital asset pricing model. It is a measure of the volatility–or
systematic risk–of a security or portfolio compared to the market as a whole. Beta data about an
individual stock can only provide an investor with an approximation of how much risk the stock
will add to a diversified portfolio. For beta to be meaningful, the stock should be related to the
benchmark that is used in the calculation.
Portfolio return: Portfolio return is the weighted average of the individual securities return
included in the portfolio or portfolio return. It refers to the gain or loss realized by an investment
portfolio containing several types of investments. Portfolio returns seek to meet the stated
benchmarks, meaning a diversified portfolio of stock/bond holdings or a mix of the two asset
classes. It’s also aims to deliver returns based on the stated objectives of the investment strategy,
as well as risk tolerance. Investors typically have one or more types of portfolios in their
investments and they seek to achieve a balanced return over time. There are many types of
portfolios available to investors right from equities, debt to Balanced Fund consisting of a mix of
stocks, bonds, and cash.

Portfolio Beta: portfolio Beta is the weighted average of the individual beta’s included in the
portfolio.

Firm specific risk: Firm specific risk is the risk which can be reduced by diversification and firm
specific risk is also called the diversifiable risk because if you a firm is facing any problem like
lawsuits or strikes then the risk can be diversified by the other firms like if the other firms gives
high rate of return .

Specific risk: Specific risk is a risk that affects a very small number of assets. This is sometimes
referred to as "unsystematic risk". In a balanced portfolio of assets there'd be a spread between
general market risk and risks specific to individual components of that portfolio.

Market risk: Market risk is also called the non- diversifiable risk because if you are in the market
and investing then you cannot avoid or eliminate it. It cannot ne diversified because it will affect
every firm and the economy like inflation. Market risk is also called the relevant risk because
market will give you return and it cannot be diversified or avoid it is also called systematically
risk. We can also Market risk is the risk of losses in positions arising from movements in market
prices. There is no unique classification as each classification may refer to different aspects of
market risk. Nevertheless, the most commonly used types of market risk are:

• Equity risk
• Currency risk
• Commodity risk
• Margining risk
• Shape risk
• Holding period risk
• Basis risk

CAMP (capital Asset Pricing Model): It describes the relationship between systematic risk and
expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing
risky securities and generating expected returns for assets given the risk of those assets and the
cost of capital. Debt price is interest and equity price are a return

CAPM argues that the only relevant risk is market risk and the investors will get a return on their
investment only for assuming the market risk and the market return will be determined by the beta.