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Flashcards in Bond & Share Valuation Deck (25):
1

What is the financial market?

Where money and financial securities (stocks & bonds) and some commodities (agri goods and precious metals) are traded

2

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

3

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.

4

What is an indenture?

The written agreement between corporation & the lender, detailing the terms of the debt issue (e.g. coupon, face value & maturity).

5

Define face value

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

6

Define coupon

the stated interest payment made on the bond.

7

Define maturity

The specified date in which the principal amount of bond is paid.

8

Define Yield to maturity (YTM)

The interest rate required in the market on a bond.

9

What is the definition of a bond value?

Bond value=PV of annuity+PV of face value
C[(1/r)-1/r(1+r)^t]+FV/(1+r)^t

10

How do coupons change given semi-annual coupon payments vs annual coupon payments?

C/2
r/2
tx2

11

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.

12

Define current yield

current yield=annual coupon/initial price

13

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

14

What is an annuity?

A level stream of cash flows for a fixed period of time
PV=C[1/r-1/r(1+r)^t]
FV=C[((1+r)^t-1)/r]

15

What is a perpetuity?

A level stream of cash flows forever
PV=C/r

16

What is the PV for a growing perpetuity?

C/(r-g)

17

What is the fisher effect?

the relationship between nominal interest rate, real interest rate and expected interest rate.
R(nom)=r(real)+infl

18

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.

19

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.

20

Characteristics of equity

Ownership interest
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

21

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.

22

What is the PV for a dividend (one period)?

dividend/(1+r)+equity price/(1+r)

23

What is the PV for a dividend (two period)?

dividend/(1+r)+Dividend(2)/(1+r)^2+equity price/(1+r)^2

24

What is zero growth?

dividends expected to grow at regular intervals forever.
Perpetuity=D/R

25

What is a constant growth stock?

One whose dividends are expected to grow forever at a constant rate, g.
D(1)=D(0)(1+g), D(2)=D(0)(1+g)^2
where D(0) is the dividend just paid