Joann L.

Sacol

BSA 1-25

Prof. Marty

March 05, 2014

ASSIGNMENT:
Terminologies:
1. Indenture- A legal and binding contract between a bond issuer and the bondholders. The
indenture specifies all the important features of a bond, such as its maturity date, timing of interest
payments, method of interest calculation, callable/convertible features if applicable and so on. The
indenture also contains all the terms and conditions applicable to the bond issue. Other critical
information included in the indenture are the financial covenants that govern the issuer and the
formulas for calculating whether the issuer is within the covenants.
Should a conflict arise between the issuer and bondholders, the indenture is the reference document
used for conflict resolution. As a result, the indenture contains all the minutiae of the bond issue.
In the fixed-income market, an indenture is hardly ever referred to when times are normal. But the
indenture becomes the go-to document when certain events take place, such as if the issuer is in
danger of violating a bond covenant. The indenture will then be scrutinized closely to make sure there
is no ambiguity in calculating the financial ratios that determine whether the issuer is abiding by the
covenants. The indenture is another name for the bond contract terms, which are also referred to as a
deed of trust.
Agreement about bond a formal document showing the terms of agreement on a bond issue
2. Debenture Bond- A type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of the issuer. Both
corporations and governments frequently issue this type of bond in order to secure capital. Like other
types of bonds, debentures are documented in an indenture.
Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that
the bond issuer is unlikely to default on the repayment. An example of a government debenture would
be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are
generally considered risk free because governments, at worst, can print off more money or raise
taxes to pay these type of debts.
Documentation of unsecured bond a certificate showing that a debenture has been issued, and
giving its terms and conditions
3. Mortgage-Senior/Junior
Mortgage Junior- A mortgage that is subordinate to a first or prior (senior) mortgage. A junior
mortgage often refers to a second mortgage, but it could also be a third or fourth mortgage. In the
case of foreclosure, the senior mortgage will be paid down first.
Common uses of junior mortgages include piggy-back mortgages (80-10-10 mortgages) and home
equity loans. Piggy-back mortgages provide a way for borrowers with less than a 20% down payment
to avoid costly private mortgage insurance. Home equity loans are frequently used to extract equity
for a home to pay down other debts or make additional purchases. Every borrowing scenario should
be carefully and thoroughly analyzed.
-mortgage with low priority for repayment mortgage whose holder has less claim on a debtor's assets
than the holder of another mortgage.
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Mortgage-Senior- mortgage with higher claim on assets than others a mortgage whose holder has
more claim on the debtor's assets than the holder of another mortgage with the same mortgagee.
4. Bond Discount- A bond that is issued for less than its par (or face) value, or a bond currently
trading for less than its par value in the secondary market.
The "discount" in a discount bond doesn't necessarily mean that investors get a better yield than the
market is offering, just a price below par. Depending on the length of time until maturity, zero-coupon
bonds can be issued at very large discounts to par, sometimes 50% or more.
Because a bond will always pay its full face value at maturity (assuming no credit events occur),
discount bonds issued below par - such as zero-coupon bonds - will steadily rise in price as the
maturity date approaches. These bonds will only make one payment to the holder (par value at
maturity) as opposed to periodic interest payments.
A distressed bond (one that has a high likelihood of default) can also trade for huge discounts to par,
effectively raising its yield to very attractive levels. The consensus, however, is that these bonds will
not receive full or timely interest payments at all; because of this, investors who buy into these issues
become very speculative, possibly even making a play for the company's assets or equity.
The difference between the face value of a bond and the lower price at which it is issued
5. Sinking Fund- A means of repaying funds that were borrowed through a bond issue. The issuer
makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the
open market.
Rather than the issuer repaying the entire principal of a bond issue on the maturity date, another
company buys back a portion of the issue annually and usually at a fixed par value or at the current
market value of the bonds, whichever is less. Should interest rates decline following a bond issue,
sinking-fund provisions allow a firm to lessen the interest rate risk of its bonds as it essentially
replaces a portion of existing debt with lower-yielding bonds.
From the investor's point of view, a sinking fund adds safety to a corporate bond issue: with it, the
issuing company is less likely to default on the repayment of the remaining principal upon maturity
since the amount of the final repayment is substantially less. This added safety affects the interest
rate at which the company is able to offer bonds in the marketplace.
Money put aside periodically to settle a liability or replace an asset. The money is invested to produce
a required sum at an appropriate time.
6. Bond Refunding-Bonds that have their principle cash amount already held aside by the original
issuer of the debt. A subset of the municipal and corporate bond classes, the funds required to pay off
refunded bonds are held in escrow until the maturity date, usually by purchasing Treasury or agency
paper.
Also known as "prerefunded bonds".
Refunded bonds will typically be 'AAA' rated due to the cash backing and, as such, will offer little
premium to equivalent-term Treasuries. The date of refunding will usually be the first callable date of
the bonds.
The process of a government's renewing of the funding of a debt by issuing new bonds to replace
those that are about to mature
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7. Bond Premium- A bond that is trading above its par value. A bond will trade at a premium when it
offers a coupon rate that is higher than prevailing interest rates. This is because investors want a
higher yield, and will pay more for it.
For example, if a bond has a 7% coupon at a time when the prevailing interest rate is 5%, investors
will "bid up" the price of the bond until its yield to maturity is in line with the market interest rate of 5%.
As a result of this bidding up process, the bond will trade at a premium to its par value. A bond
premium will reduce the yield to maturity of the bond, while a bond discount will enhance its yield. The
size of the premium will decline as the bond approaches maturity. The premium will dwindle to zero at
maturity, since bond issues are generally redeemed at par.
The difference between the face value of a bond and a higher price at which it is issued
8. Bond Carrying Value- An accounting measure of value, where the value of an asset or a company
is based on the figures in the company's balance sheet. For assets, the value is based on the original
cost of the asset less any depreciation, amortization or impairment costs made against the asset. For
a company, carrying value is a company's total assets minus intangible assets and liabilities such as
debt.
Also known as "book value".
This is different from market value, as it can be higher or lower depending on the circumstances, the
asset in question and the accounting practices that affect them. In many cases, the carrying value of
an asset and its market value will differ greatly. This is because, in accordance with accounting rules,
the assets are held based on original costs. If a company holds land that was purchased 100 years
ago, it holds it at the cost paid. Over time, however, this real estate has likely gained considerably in
value.
9. Bond Discount
10. Callable Bonds- A bond that can be redeemed by the issuer prior to its maturity. Usually a
premium is paid to the bond owner when the bond is called.
Also known as a "redeemable bond."
The main cause of a call is a decline in interest rates. If interest rates have declined since a company
first issued the bonds, it will likely want to refinance this debt at a lower rate of interest. In this case,
company will call its current bonds and reissue them at a lower rate of interest.
A bond that may be bought back by the issuer prior to its maturity date
11. Common Stock- A security that represents ownership in a corporation. Holders of common stock
exercise control by electing a board of directors and voting on corporate policy. Common
stockholders are on the bottom of the priority ladder for ownership structure. In the event of
liquidation, common shareholders have rights to a company's assets only after bondholders,
preferred shareholders and other debt holders have been paid in full.
In the U.K., these are called "ordinary shares."
If the company goes bankrupt, the common stockholders will not receive their money until the
creditors and preferred shareholders have received their respective share of the leftover assets. This
makes common stock riskier than debt or preferred shares. The upside to common shares is that they
usually outperform bonds and preferred shares in the long run.
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A stock that provides voting rights but only pays a dividend after dividends for preferred stock have
been paid.
12. Preferred Stock- A class of ownership in a corporation that has a higher claim on the assets and
earnings than common stock. Preferred stock generally has a dividend that must be paid out before
dividends to common stockholders and the shares usually do not have voting rights.
The precise details as to the structure of preferred stock is specific to each corporation. However, the
best way to think of preferred stock is as a financial instrument that has characteristics of both debt
(fixed dividends) and equity (potential appreciation).
Also known as "preferred shares".
There are certainly pros and cons when looking at preferred shares. Preferred shareholders have
priority over common stockholders on earnings and assets in the event of liquidation and they have a
fixed dividend (paid before common stockholders), but investors must weigh these positives against
the negatives, including giving up their voting rights and less potential for appreciation.
Stock that entitles the owner to preference in the distribution of dividends and the proceeds of
liquidation in the event of bankruptcy.
13. Cumulative Stock- A type of preferred stock with a provision that stipulates that if any dividends
have been omitted in the past, they must be paid out to preferred shareholders first, before common
shareholders can receive dividends.
A preferred stock will typically have a fixed dividend yield based on the par value of the stock. This
dividend is paid out at set intervals, usually quarterly, to preferred holders. If a company runs into
some financial problems and is unable to meet all of its obligations, it will likely suspend its dividend
payments and focus on paying the business-specific expenses. If the company gets through the
trouble and starts paying out dividends again, it will first have to pay back all of the dividends that are
owed to preferred share holders.
Preferred stock whose dividends accumulate if not paid
A type of preferred stock that will have the dividend paid at a later date even if the company is not
able to pay a dividend in the current year.

Related definitions of "cumulative preferred stock"

UK term cumulative preference share
14. Non-Cumulative Stock- A type of preferred stock that does not pay the holder any unpaid or
omitted dividends. If the corporation chooses to not pay dividends in a given year, the investor does
not have the right to claim any of those forgone dividends in the future.
In the case that preferred shares are cumulative, holders are entitled to any missed or omitted
dividends. For example, let's assume that ABC Company chooses to not pay its $1.10 annual
dividend to its cumulative preferred stockholders. In this case, these shareholders do not receive the
dividend this year, but they are entitled to collect this dividend at some point in the future. If the
preferred shares mentioned above were noncumulative, the shareholders would never receive the
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missed dividend of $1.10. The example above illustrates why a cumulative preferred share is worth
more than a noncumulative preferred share.
15. Stock- A type of security that signifies ownership in a corporation and represents a claim on part
of the corporation's assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner
to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have
voting rights, but has a higher claim on assets and earnings than the common shares. For example,
owners of preferred stock receive dividends before common shareholders and have priority in the
event that a company goes bankrupt and is liquidated.
Also known as "shares" or "equity."
A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. In
other words, a shareholder is an owner of a company. Ownership is determined by the number of
shares a person owns relative to the number of outstanding shares. For example, if a company has
1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have
claim to 10% of the company's assets.
Stocks are the foundation of nearly every portfolio. Historically, they have outperformed most other
investments over the long run.
16. Stock Split- A corporate action in which a company divides its existing shares into multiple
shares. Although the number of shares outstanding increases by a specific multiple, the total dollar
value of the shares remains the same compared to pre-split amounts, because the split did not add
any real value. The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder
will have two or three shares for every share held earlier.
Also known as a "forward stock split."
In the U.K., a stock split is referred to as a "scrip issue," "bonus issue," "capitalization issue" or "free
issue."
For example, assume that XYZ Corp. has 20 million shares outstanding and the shares are trading at
$100, which would give it a $2 billion market capitalization. The companys board of directors decides
to split the stock 2-for-1. Right after the split takes effect, the number of shares outstanding would
double to 40 million, while the share price would be $50, leaving the market cap unchanged at $2
billion.
Why do companies go through the hassle and expense of a stock split? For a couple of very good
reasons:
First, a split is usually undertaken when the stock price is quite high, making it pricey for investors to
acquire a standard board lot of 100 shares. If XYZ Corp.'s shares were worth $100 each, an investor
would need to purchase $10,000 to own 100 shares. If each share was worth $50, the investor would
only need to pay $5,000 to own 100 shares.
Second, the higher number of shares outstanding can result in greater liquidity for the stock, which
facilitates trading and may narrow the bid-ask spread.
While a split in theory should have no effect on a stock's price, it often results in renewed investor
interest, which can have a positive impact on the stock price. While this effect can be temporary, the
fact remains that stock splits by blue chip companies are a great way for the average investor to
accumulate an increasing number of shares in these companies. Many of the best companies
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routinely exceed the price level at which they had previously split their stock, causing them to
undergo a stock split yet again. Wal-Mart, for instance, has split its shares as many as 11 times on a
2-for-1 basis from the time it went public in October 1970 to March 1999. An investor who had 100
shares at Wal-Marts IPO would have seen that little stake grow to 204,800 shares over the next 30
years.
An act of issuing stockholders with at least one more share for every share owned, without affecting
the total value of each holding. A stock split usually occurs because the stock price has become too
high for easy trading.
17. Stock Rights- Share Purchase Rights
A type of security that gives the holder the option, but not the obligation, to purchase a predetermined
number of shares at a predetermined price. This is similar to a stock option or warrant. These rights
are typically distributed to existing shareholders, who have the ability to trade these rights on an
exchange.
The rights only give shareholders the ability to purchase the shares, but they must still must pay for
the shares to redeem the rights.
Rights
A security giving stockholders entitlement to purchase new shares issued by the corporation at a
predetermined price (normally at a discount to the current market price) in proportion to the number of
shares already owned. Rights are issued only for a short period of time, after which they expire.
Also known as "subscription rights" or "share purchase rights."
Rights can and do trade independently of the underlying stock on an exchange. Similar to options, the
price of a right is determined by a number of factors, such as its subscription price, the underlying
stock price, its volatility, interest rates and time to expiration. The intrinsic or theoretical value of a
right during the cum rights period - when the stock trades with the rights attached - is different from
the value of a right during the ex-rights period, when it trades independently.
Rights Offering (Issue)
An issue of rights to a company's existing shareholders that entitles them to buy additional shares
directly from the company in proportion to their existing holdings, within a fixed time period. In a rights
offering, the subscription price at which each share may be purchased in generally at a discount to
the current market price. Rights are often transferable, allowing the holder to sell them on the open
market.

For example, a company whose stock is trading at $20 may announce a rights offering whereby its
shareholders will be granted one right for each share held by them, with four rights required to buy
each new share at a subscription price of $19. The company will also specify that the rights expire on
a certain date, which is usually anywhere from one to three months from the date of announcement of
the rights offering.

Companies typically issue rights to give their existing shareholders the opportunity to buy additional
shares before other buyers, and also to enable current shareholders to maintain their proportionate
stake in the company.
18. Treasury Shares- The portion of shares that a company keeps in their own treasury. Treasury
stock may have come from a repurchase or buyback from shareholders; or it may have never been
issued to the public in the first place. These shares don't pay dividends, have no voting rights, and
should not be included in shares outstanding calculations.
Treasury stock is often created when shares of a company are initially issued. In this case, not all
shares are issued to the public, as some are kept in the companies treasury to be used to create
extra cash should it be needed. Another reason may be to keep a controlling interest within the
treasury to help ward off hostile takeovers.
Alternatively, treasury stock can be created when a company does a share buyback and purchases
its shares on the open market. This can be advantageous to shareholders because it lowers the
number of shares outstanding. However, not all buybacks are a good thing. For example, if a
company merely buys stock to improve financial ratios such as EPS or P/E, then the buyback is
detrimental to the shareholders, and it is done without the shareholders' best interests in mind.
Shares of a company's stock that have been bought back by the company and not canceled. In the
United States, these shares are shown as deductions from equity, in the United Kingdom, they are
shown as assets in the balance sheet.
19. Reverse Split- A corporate action in which a company reduces the total number of its outstanding
shares. A reverse stock split involves the company dividing its current shares by a number such as 5
or 10, which would be called a 1-for-5 or 1-for-10 split, respectively. A reverse stock split is the
opposite of a conventional (forward) stock split, which increases the number of shares outstanding.
Similar to a forward stock split, the reverse split does not add any real value to the company. But
since the motivation for a reverse split is very different from that for a forward split, the stocks price
moves after a reverse and forward split may be quite divergent. A reverse stock split is also known as
a stock consolidation or share rollback.
If a company has 200 million shares outstanding and the shares are trading at 20 cents each, a 1-for10 reverse split would reduce the number of shares to 20 million, while the shares should trade at
about $2. Note that the companys market capitalization pre-split and post-split should theoretically
at least be unchanged at $40 million.
But in the real world, a stock that has undergone a reverse split may well come under renewed selling
pressure. In the above instance, if the stock declines to a price of $1.80 after the reverse split, the
companys market cap would now be $36 million. Conversely, with a forward split, the stock may gain
post-split because it is perceived as a success and its lower price might attract more investors.
In the vast majority of cases, a reverse split is undertaken to fulfill exchange listing requirements. An
exchange generally specifies a minimum bid price for a stock to be listed. If the stock falls below this
bid price, it risks being delisted. Exchanges temporarily suspend this minimum price requirement
during uncertain times; for example, the NYSE and Nasdaq suspended the minimum $1 price
requirement for stocks listed during the 2008-09 bear market. However, during normal business
times, a company whose stock price has declined precipitously over the years may have little choice
but to undergo a reverse stock split to maintain its exchange listing.

A secondary benefit of a reverse split is that by reducing the shares outstanding and share float, the
stock becomes harder to borrow, making it difficult for short sellers to short the stock. The limited
liquidity may also widen the bid-ask spread, which in turn deters trading and short selling.
The ratios associated with reverse splits are typically higher than those for forward splits, with some
splits done on a 1-for-10, 1-for-50 or even 1-for-100 basis.
The issuing to stockholders of a fraction of one share for every share that they own.
20. Participating Stock- A type of preferred stock that gives the holder the right to receive dividends
equal to the normally specified rate that preferred dividends receive as well as an additional dividend
based on some predetermined condition.
The additional dividend paid to preferred shareholders is commonly structured to be paid only if the
amount of dividends that common shareholders receive exceeds a specified per-share amount.
Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to
receive the stock's purchasing price back as well as a pro-rata share of any remaining proceeds that
the common shareholders receive.
or example, suppose Company A issues participating preferred shares with a dividend rate of $1 per
share. The preferred shares also carry a clause on extra dividends for participating preferred stock,
which is triggered whenever the dividend for common shares exceeds that of the preferred shares.
If, during its current quarter, Company A announces that it will release a dividend of $1.05 per share
for its common shares, the participating preferred shareholders will receive a total dividend of $1.05
per share ($1.00 + 0.05) as well.
Participating preferred stock is rarely issued, but one way in which it is used is as a poison pill. In this
case, current shareholders are issued stock that gives them the right to new common shares at a
bargain price in the event of an unwanted takeover bid.
A type of preferred stock that entitles the holder to a fixed dividend and, in addition, to the right to
participate in any surplus profits after payment of agreed levels of dividends to holders of common
stock has been made.
21. Stock Purchase Plan- Employee Stock Purchase Plan - ESPP
A company-run program in which participating employees can purchase company shares at a
discounted price. Employees contribute to the plan through payroll deductions, which build up
between the offering date and the purchase date. At the purchase date, the company uses the
accumulated funds to purchase shares in the company on behalf of the participating employees. The
amount of the discount depends on the specific plan but can be as much as 15% lower than the
market price.
Depending when you sell the shares, the disposition will be classified as either qualified or not
qualified. If the position is sold two years after the offering date and at least one year after the
purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years
of the offering date or one year after the purchase date the disposition will not be qualified. These
positions will have different tax implications.
In the United States, a plan to encourage employees to buy a stake in the company that employs
them by awarding free or discounted stock. Such plans may be available to some or all employees,
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and plans approved by the Internal Revenue Service enjoy tax advantages. Among the potential
benefits are improved employee commitment and productivity, but the success of a plan may depend
on linking it to employee performance and the performance of the price of stock.
22. Vertical Integration- When a company expands its business into areas that are at different points
on the same production path, such as when a manufacturer owns its supplier and/or distributor.
Vertical integration can help companies reduce costs and improve efficiency by decreasing
transportation expenses and reducing turnaround time, among other advantages. However,
sometimes it is more effective for a company to rely on the expertise and economies of scale of other
vendors rather than be vertically integrated.
Backward and forward integration are types of vertical integration. A company that expands backward
on the production path has backward integration, while a company that expands forward on the
production path is forward integrated.
Examples of vertical integration include:
- A mortgage company that both originates and services mortgages, meaning that it both lends money
to homebuyers and collects their monthly payments.
- A solar power company that produces photovoltaic products and also manufacturers the cells,
wafers and modules to create those products would be considered vertically integrated.
- The merger of Live Nation and Ticketmaster created a vertically integrated entertainment company
that manages and represents artists, produces shows and sells event tickets.
The practice of combining some or all of the sequential operations of the supply chain between the
sourcing of raw materials and sale of the final product. Vertical integration can be pursued as a
strategy through the acquisition of suppliers, wholesalers, and retailers to increase control and
reliability. It can also be achieved when a company gains strong control over suppliers or distributors,
usually by exercising purchasing power.
23. Horizontal Integration- The acquisition of additional business activities that are at the same level
of the value chain in similar or different industries. This can be achieved by internal or external
expansion. Because the different firms are involved in the same stage of production, horizontal
integration allows them to share resources at that level. If the products offered by the companies are
the same or similar, it is a merger of competitors. If all of the producers of a particular good or service
in a given market were to merge, it would result in the creation of a monopoly. Also called lateral
integration.
Examples of horizontal integration include an oil company's acquisition of additional oil refineries, or
an automobile manufacturer's acquisition of a light truck manufacturer. Horizontal integration offers
several advantages, including favorable economies of scale, economies or scope, increased market
power and reduction in the costs associated with international trade by operating in foreign markets.
Horizontal integration is in contrast to vertical integration, where firms expand into different activities,
known as upstream or downstream activities.
The merging of functions or organizations that operates on a similar level. Horizontal integration
involves the amalgamation of companies producing the same types of goods or operating at the
same stage of the supply chain. It may also describe the merging of departments within an
organization that perform similar tasks.

24. Synergetic Effect- is an effect arising between two or more agents, factors, entities, or
substances that produce an effect greater than the sum of their individual effects. It is opposite of
antagonism. It can be the capacity of two or more drugs acting together so the total effect is greater
than if taken separately.
An effect arising between two or more agents, entities, factors, or substances that produces an effect
greater than the sum of their individual effects. It is opposite of antagonism.
Synergy
The concept that the value and performance of two companies combined will be greater than the sum
of the separate individual parts. Synergy is a term that is most commonly used in the context of
mergers and acquisitions. Synergy, or the potential financial benefit achieved through the combining
of companies, is often a driving force behind a merger. Shareholders will benefit if a company's postmerger share price increases due to the synergistic effect of the deal. The expected synergy achieved
through the merger can be attributed to various factors, such as increased revenues, combined talent
and technology, or cost reduction.
Mergers and acquisitions are made with the goal of improving the company's financial performance
for the shareholders. Two businesses can merge to form one company that is capable of producing
more revenue than either could have been able to independently, or to create one company that is
able to eliminate or streamline redundant processes, resulting in significant cost reduction. Because
of this principle, the potential synergy is examined during the merger and acquisition process. If two
companies can merge to create greater efficiency or scale, the result is what is sometimes referred to
as a synergy merge.
For example, when the Proctor & Gamble Company acquired Gillette in 2005, a P&G news release
cited that "The increases to the company's growth objectives are driven by the identified synergy
opportunities from the P&G/Gillette combination. The company continues to expect cost synergies of
approximately $1 to $1.2 billionand an increase in the annual sales run-rate of about $750 million
by 2008." In the same press release, then P&G chairman, president and chief executive A.G. Lafley
stated, "We are both industry leaders on our own, and we will be even stronger and even better
together." This is the idea behind synergy - that by combining two companies the financial results are
greater than what either could have achieved alone.
25. Leverage Buy-Out (LBO)- The acquisition of another company using a significant amount of
borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company
being acquired are used as collateral for the loans in addition to the assets of the acquiring company.
The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to
commit a lot of capital.
In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio,
the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts
have had a notorious history, especially in the 1980s when several prominent buyouts led to the
eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage
ratio was nearly 100% and the interest payments were so large that the company's operating cash
flows were unable to meet the obligation.
One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis
Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for
the acquisition.

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It can be considered ironic that a company's success (in the form of assets on the balance sheet) can
be used against it as collateral by a hostile company that acquires it. For this reason, some regard
LBOs as an especially ruthless, predatory tactic.
26. Voluntary Insolvency
Voluntary Liquidation
A corporate liquidation that has been approved by the shareholders of the company. Voluntary
liquidations stand in contrast to involuntary liquidations, which are a result of Chapter 7 bankruptcy.
The shareholder vote allows the company to liquidate its assets to free up funds to pay debts.
Voluntary liquidations in the UK are divided into two categories. One is the creditors' voluntary
liquidation, which occurs under a state of corporate insolvency. The other is the members' voluntary
liquidation, which only requires a corporate declaration of bankruptcy. Under the second category, the
firm is solvent, but needs to liquidate their assets to meet their upcoming obligations.
Voluntary liquidation can also happen if a vital member of the organization leaves the company and
the shareholders decide not to continue operations.
Voluntary Bankruptcy
A type of bankruptcy where an insolvent debtor brings the petition to a court to declare bankruptcy
because he or she (in the case of an individual) or it (in the case of a business entity) is unable to pay
off debts. The bankruptcy is intended to create an orderly and equitable settlement of the debtor's
obligations.
Voluntary bankruptcy is a bankruptcy proceeding initiated by a debtor who knows that they will not be
able to satisfy the debt requirements of creditors. Voluntary bankruptcy is typically commenced when
and if a debtor finds no other solution to the financial situation. Voluntary bankruptcy differs from
involuntary bankruptcy which occurs when one or more creditors petitions a court to judge the debtor
as insolvent (unable to pay).
27. Involuntary Insolvency- In legal terminology, the situation where the liabilities of a person or firm
exceed its assets. In practice, however, insolvency is the situation where an entity cannot raise
enough cash to meet its obligations, or to pay debts as they become due for payment.
Properly called technical insolvency, it may occur even when the value of an entity's total
assets exceeds its total liabilities. Mere insolvency does not afford enough ground for lenders to
petition for involuntary bankruptcy of the borrower, or force a liquidation of his or her assets.
Involuntary Bankruptcy
A legal proceeding in which a person or business is requested to go into bankruptcy by creditors,
rather than on the person or business' own accord. Creditors seeking involuntary bankruptcy must
petition the court to initiate the proceedings, and the indebted party can file an objection to force a
case.

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Involuntary bankruptcy is requested by creditors who feel that they will not be paid if bankruptcy
proceedings are not entered into, and seek a legal requirement to force the debtor to pay. In order for
involuntary bankruptcy to be brought forward, the debtor must have a certain amount of debt that
must be met. This amount depends on whether the debtor is an individual or a business.
28. Debt to Equity Conversion
Debt/Equity Swap
A transaction in which the obligations (debts) of a company or individual are exchanged for something
of value (equity). In the case of a publicly-traded company, this would generally entail an exchange of
bonds for stock. The value of the stocks and bonds being exchanged are typically determined by the
market at the time of the swap.
A debt/equity swap is a refinancing deal in which a debtholder gets an equity position in exchange for
cancellation of the debt. The swap is generally done to help a struggling company continue to operate
(after all, an insolvent company can't pay its debts or improve its equity standing). However,
sometimes a company may simply wish to take advantage of favorable market conditions.
Covenants in the bond indenture may prevent a swap from happening without consent.
29. Receivership- A type of corporate bankruptcy in which a receiver is appointed by bankruptcy
courts or creditors to run the company. The receiver may be appointed by a bankruptcy court, as a
matter of private proceedings, or by a governing body. In most cases the receiver is given ultimate
decision-making powers and has full discretion in deciding how the received assets will be managed.
The primary responsibility of the receiver is to recoup as much of the unpaid loans as possible. Being
in receivership is not an enviable situation for any company. Oftentimes, receivers find that the best
way to pay back loans is to liquidate the company's assets, which effectively puts the company out of
business, as its assets are sold at deep discounts in order to recoup some of the monies owed.
30. Aggressive Financing Strategy
Aggressive Investment Strategy
A portfolio management strategy that attempts to maximize returns by taking a relatively higher
degree of risk. An aggressive investment strategy emphasizes capital appreciation as a primary
investment objective, rather than income or safety of principal. Such a strategy would therefore have
an asset allocation with a substantial weighting in stocks, and a much smaller allocation to fixed
income and cash. Aggressive investment strategies are especially suitable for young adults because
their lengthy investment horizon enables them to ride out market fluctuations better than investors
with a short investment horizon. Regardless of the investors age, however, a high tolerance for risk is
an absolute prerequisite for an aggressive investment strategy.
The aggressiveness of an investment strategy depends on the relative weight of high-reward, highrisk
asset
classes
such
as
equities
and
commodities
within
the
portfolio.
For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income and 10%
commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities
and commodities. However, it would still be less aggressive than Portfolio B, which has an asset
allocation of 85% equities and 15% commodities.
But even within the equity component of an aggressive portfolio, the composition of stocks can have
a significant bearing on its risk profile. For instance, if the equity component only comprises blue-chip
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stocks, it would be considered less risky than if the portfolio only held small-capitalization stocks. If
this is the case in the earlier example, Portfolio B could arguably be considered less aggressive than
Portfolio A, even though it has 100% of its weight in aggressive assets.
An aggressive strategy needs more active management than a conservative buy-and-hold strategy,
since it is likely to be much more volatile and would need more frequent adjustments to tailor it to
changing market conditions. More frequent rebalancing would also be required to bring portfolio
allocations back to their target levels, as the volatility of the assets that comprise an aggressive
portfolio will quite often lead allocations to deviate significantly from the original or target weights.
31. Conservative Financing Strategy
Conservative Investing
An investing strategy that seeks to preserve an investment portfolio's value by investing in lower risk
securities such as fixed-income and money market securities, and often blue-chip or large-cap
equities.
Conservative investors have risk tolerances ranging from low to moderate. Those who have low risk
tolerance are often extremely uncomfortable with the stock market and wish to avoid it entirely.
However, although this strategy may protect against inflation, it will not earn any value over time.
Capital preservation and current income are popular conservative investing strategies.
32. Stretching Payables- Postponing payment of the amount due to suppliers beyond the end of the
net (credit) period; also called leaning on the trade.
"Stretching" Accounts Payables (i.e. paying accounts payables past the due date without remitting the
penalty, or paying after the discount period has expired but still taking the discount) is 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.
33. Prime Interest Rate- The interest rate that commercial banks charge their most credit-worthy
customers. Generally a bank's best customers consist of large corporations. The prime interest rate,
or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate
which banks lend to one another. The prime rate is also important for retail customers, as the prime
rate directly affects the lending rates which are available for mortgage, small business and personal
loans.
Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a
bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower
than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.
34. Effective Interest Rate- An investment's annual rate of interest when compounding occurs more
often than once a year. Calculated as the following:

Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100.
However, if compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year,
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rendering an effective annual interest rate of 10.47%. Basically the effective annual rate is the annual
rate of interest that accounts for the effect of compounding.
35. Floating Interest Rate- An interest rate that is allowed to move up and down with the rest of the
market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a
debt
obligation
stays
constant
for
the
duration
of
the
agreement.
A floating interest rate can also be referred to as a variable interest rate because it can vary over the
duration of the debt obligation.
For example, residential mortgages can be obtained with a fixed interest rate, which is static and can't
change for the duration of the mortgage agreement, or with a floating interest rate, which changes
periodically with the market. In the case of floating interest rates in mortgages, and most other floating
rate agreements, the prime lending rate is used as a basis for the floating rate, with the agreement
stating that the interest rate charged to the borrower is the prime interest rate plus a certain spread.
References:
http://www.investopedia.com/
http://www.businessdictionary.com/definition/insolvency.html
http://www.ask.com/question/definition-of-synergistic-effects
http://www.businessdictionary.com/definition/synergistic-effect.html\
http://www.encyclo.co.uk/define/Stretching%20accounts%20payable
http://www.encyclo.co.uk/define/Stretching%20accounts%20payable
http://financialrounds.blogspot.com/2008/06/stretching-accounts-payables.html

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