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Flashcards in Corporate Finance Exam Deck (91)
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1

Current Yield

Annual Coupon Payments/ Price

2

Future Value

C x (1 + r) ^ n

PV * (1 + r) ^ n

3

PV (discount)

C / (1 + r) ^ n

4

Growing Perpetuity

C / (r - g)

5

Fishers

1 + R = (1 + Rr) * (1 + h)

Nominal = R
Real Return = You would like to earn

6

CPN

(Coupon Rate * Face Value) / coupon payments per year

7

YTM

Discount Rate for bonds

8

Zero Coupon Bonds

Only FV, trades at discount
Pure discount bond / spot interest yield

Treasury Bills

YTM = return you will earn from holding the bond to maturity and receiving promised FV

Price increases as term decreases

IRR = YTM = Yield

9

Formula Zero Coupon Price

FV/ (1 + YTM)^n

10

YTM Zero Coupon

(FV/P) ^1/n - 1

11

Coupon Bonds

Treasury notes/treasury bonds

CPN + FV

Price decreases as term increases due to number of coupon bonds remaining

12

Yield Treasury

(FV - Price)/Price * (365/days) * 100

This is the same thing as:

FV/P - 1 * (365/days) * 100

13

Dirty vs. Clean Price

When bond fluctuates according to closeness to bond payment - clean price removes this effect

14

Discounts and Premium

Coupon Rate > YTM = Premium
Coupon Rate = YTM = Par
Coupon Rate < YTM = Discount

15

Interest Rate effect

Rises - prices fall (higher discount rate)
Falls - prices rise (lower discount rate)

16

Sensitivity of bonds

Depends on timing of cash flows due to interest rates
Shorter: less affected
Higher CPN: less affected (higher cash flows up front)

17

Reinvestment Risk

Uncertainty concerning rates C reinvested
- Short term (more reinvestment risk)
- Higher CPN (more reinvestment risk)

18

Yield Curve

Relationship between (yield) interest and maturity (term)

Interest rate expectations drive yield curve

Yield is essentially the higher return (higher discount).

Steep yield curve (interest rates expected to rise)
Inverted (interest rates expected to fall) negative forecast

Practice drawing both.

19

Corporate Bonds

Risk of default = credit risk

Promised is the most you could hope to receive. It's not equal to expected cash flows due to risk of default.
= investors will pay less.

20

Corporate Bonds P

Expected/ (1 + YTM)

Expected = probability into account.
Discount rate is the debt cost of capital = expected return

21

Corporate Bonds YTM

(FV/P) - 1

Discount rate (YTM) = Debt cost of capital
Use yields on corporate bond credit rating: YTM gilt + credit spread

22

Libor vs. LIBID

LIBID is the bid rate for eurocurrency deposited.
LIBOR is rate banks borrow at from each other (offer)

23

Rights for new shares

Old Shares/ New Shares Issued

24

Market Value through Equity

Direct Method: DDM - PV of Dividends Payments
Indirect Method: DCF - Forecasted Earnings

25

DDM - Required Return/Yield

RE = (Div1 + P1) / Po

Or;

RE = (DIV/Po) + g

Same as:

EPS/Share Price (other terminology)

26

Dividends Volatility

Long run: Driven by Cash Flow
Short run: Discount rates

P can change from news of cash flows (firm) or news on dividends

27

DDM

Cash flows you receive = PV of dividends
Not very practical, trying to forecast the discretionary
It's up to management

Value of company is just number of shares * Po
- effective way of measuring performance of market on an aggregate level - preferred model, but not on individual company level.

Discount rate is RE - all cash flows going to equity.
Cash & debt & interest are indirectly incorporated through earnings.

28

Common Shares

Voting rights, share proportionately in declared dividends & assets under liquidation; preemptive rights (first shot at new stock issue)

29

Preferred shares

Must be paid before common; cumulative (if div. deferred) must pay outstanding preferred before common; no voting rights, but gets FV before common on liquidation - (hence preferred) - start up, protects investors.

30

Bid Price/Sell Price

Bid price (sell) - low price
Ask Price (buy) - high price