VALUATION OF BONDS AND STOCKS (L3) Flashcards
Bonds
Bonds have lifetime maturity, the gov/companies/banks/municipal borrow from gov/financial institutions/individuals
The seller borrows money by selling bonds and the buyer/lender knows when they’re getting the money back
Examples of bonds
Treasury Bills
Treasury Notes
Treasury Bonds
Consol Bonds
Treasury Bills
Bonds with maturity less than a year, one time payoff when bond matures
Treasury Notes
Bonds with maturity between 2-10 years, have an amount paid every period (each year eg) and a final one when bond matures
Treasury Bonds
Bonds maturing after 10 years, payoffs are regular/irregular until maturity then final payoff
Types of bonds
Coupon bond- regular payoffs until maturity then final payoff
Zero coupon bond- one single payment when bond matures
Face/principle value
The value of the final payoff of maturity bond is known
Calculating bond pricing
Face value x coupon rate gives coupon for each year, then use PV calc
Coupon/ (1+ir)^1+ coupon/(1+ir)^t , for the final coupon add on do coupon+face value/(1+ir) ^t
Yield to maturity/ interest rate
Discount rate of the bond
Return you earn on the bond by solving for r
If IR goes up, the price of a bond goes down
Risk of buying bonds
Inflation risk
Credit issues (if the company can’t repay the money)
Stock types
Ownership over a company, types:
Preferred stocks: receive dividends before others but no voting power
Common stocks: receive dividends after but have voting power
How do companies attract investors
Issuing new shares through primary market IPO then secondary markets stock exchanges
Stock pricing
Pricing formula goes to infinity as stock is owned forever
If the dividend is constant over time: div1/r
If dividend grows by g%: div1/r-g
dividend payments
Div/r
