Chapter 10 Flashcards
(22 cards)
Bond
a long-term debt instrument (loan).
yield to maturity (YTM)
The average rate of return earned on a bond if it is held to maturity.
yield to call (YTC)
The average rate of return earned on a bond if it is held until the first call date
call price
The price a firm has to pay to recall a bond; generally equal to the principal amount plus some interest.
discount bond
A bond that sells below its par value. This occurs whenever the going rate of interest rises above the coupon rate
premium bond
A bond that sells above its par value. This occurs whenever the going rate of interest falls below the coupon rate.
interest (current) yield
The interest payment divided by the market price of the bond
Capital gains yields
The percentage change in the market price of a bond over some period of time
interest rate price risk
The risk of changes in bond prices to which investors are exposed due to changing interest rates
interest rate reinvestment risk
The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates
market price, P0
The price at which a stock currently sells in the market.
intrinsic value
The value of an asset that, in the mind of a particular investor, is justified by the facts; can be different from the asset’s current market price, its book value, or both.
growth rate, g
The expected rate of change in dividends per share.
dividend yield
The expected divided by the current price of share of stock, D0/P0
capital gains yield
The change in price (capital gain) during a given year divided by the price at the beginning of the year
required rate return
The minimum rate of return on a common stock that stockholders consider acceptable.
expected rate of return
The rate of return on a common stock that an individual stockholder expects to receive. It is equal to the expected dividend yield plus the expected capital gains yield
actual (realized) rate of return
The rate of return on a common stock actually received by stockholders; can be greater than or less than the expected return, and/or the required return
zero growth stock
A common stock whose future dividends are not expected to grow at all; that is, g=0
normal (constant) growth
Growth that is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole; g= a constant
constant growth model
Also called the Gordon model; used to find the value of a stock that is expected to experience constant growth
nonconstant growth
The part of the life cycle of a firm in which its growth either is much faster or is much slower than that of the economy as a whole
