Flashcards in Bond & Share Valuation Deck (25):
What is the financial market?
Where money and financial securities (stocks & bonds) and some commodities (agri goods and precious metals) are traded
What are capital markets?
Where money can be borrowed or lent for a long period of time (over a year) in order to finance projects for corporations (or governments) e.g. bonds/shares
What is the difference between primary and secondary markets?
In the primary market investors buy securities directly from the company issuing them.
In the secondary market investors trade securities between themselves, and the issuers usually play no part in the transaction.
What is an indenture?
The written agreement between corporation & the lender, detailing the terms of the debt issue (e.g. coupon, face value & maturity).
Define face value
the principal amount of the bond that is repaid at the end of the term.
the stated interest payment made on the bond.
The specified date in which the principal amount of bond is paid.
Define Yield to maturity (YTM)
The interest rate required in the market on a bond.
What is the definition of a bond value?
Bond value=PV of annuity+PV of face value
How do coupons change given semi-annual coupon payments vs annual coupon payments?
What is the difference between a discount bond and a premium bond?
A premium bond is a bond that sells for above face value.
A discount bond is a bond that sells for below face value.
Define current yield
current yield=annual coupon/initial price
What are the criteria for Discount bonds, premium bonds and bonds that sell at par?
Bonds that sell at par: YTM=current yield=coupon rate.
Discount bond: YTM>current yield>coupon rate.
Premium bond: YTM
What is an annuity?
A level stream of cash flows for a fixed period of time
What is a perpetuity?
A level stream of cash flows forever
What is the PV for a growing perpetuity?
What is the fisher effect?
the relationship between nominal interest rate, real interest rate and expected interest rate.
Ways of receiving cash if you are a stockholder?
The company pays dividends or you can sell your shares back to company or to another investor.
Characteristics of debt
not an ownership interest.
Creditors don't have voting rights.
interest is cost of doing business & tax deductible.
creditors have legal recourse if payments aren't met.
excess debt can lead to bankruptcy.
Characteristics of equity
Common shareholders vote for board of directors
dividends aren't considered a cost of doing business and aren't tax deductable
dividends aren't a liability and therefore have no legal recourse.
an all equity firm can't go bankrupt because no debt
What are the difficulties with share valuation?
Cash flows are uncertain.
Life of investment is uncertain because they can theoretically last forever.
difficult to measure the expected return from the market.
What is the PV for a dividend (one period)?
What is the PV for a dividend (two period)?
What is zero growth?
dividends expected to grow at regular intervals forever.