Intro to finance 3

21 flashcards · Other · by Daniel F.

1. company raises new debt by issuing

   bonds

2. new equity financing by issuing

   stocks

3. The first transaction is done on the

   primary market

4. bonds

   settlement date par (redemption) value: principal or face value as a % price: market price coupon rate: annual rate of interest payment coupon frequency: interest payments by year maturity date: expiration date of bond when par value is paid yield to maturity: expected rate of return based on bond price market interest rate

5. bond payment in detail

   I buy a bond for face value * par value % I receive face value * coupon rate every year I receive par value with the last interest payment on on the maturity date

6. yield to maturity

   expected (required) rate of return (yield) of investors for a specific bond the ACTUAL return, the reason why face value and par value is different market discount rate used to determine PV of payments calculate with excel PRICE() market determined the cost for the company to issue the debt

7. why is ytm and coupon rate different

   YTM is the actual return on investment coupon rate determines the interest payment cupon > YTM -> the price is higher (premium bond) cupon < lower than the price is lower (discount bond) use YTM() in excel

8. Excel functions

   PRICE YTM

9. bond prices and interest rates are negatively correlated

   if rates go up bonds will be more discounted, their prices fall

10. interest rate risk

    longer time to maturity -> greater interest rate risk, bigger volatility The present value is not greatly effected if its only one or few years, harder to find present value in 30 years lower coupon rate -> greater interest rate risk the value is more based on the face value amount higher coupon rate pays cash up front with lower interest rate sensitivity

11. Real rate vs nominal rate

    real rate Interest rate or rate of return that has been adjusted for inflation. The percentage change in your buying power. nominal rate Interest rate or rate of return that has not been adjusted for inflation. The percentage change in the amount of cash you have.

12. How to get real interest rate

    The real rate of interest (r) The rate of inflation (h) Nominal interest rate (R) 1+R = (1+r) * (1+h) R = r + h + r*h

13. characteristics of common stock (stocks)

    financing vehicle: equity financing Ownership residual profits: dividends residual assets if bankruptcy voting right, board election cash dividends company: not tax-deductible recipient: taxable income

14. risk of stocks vs bonds

    if no profit no dividends if bankruptcy only stockholders get assets equity is riskier than bond: debt holders are payed before equity holders

15. Valuation of common stock - fundamentals

    Fundamental value: PV of expected cash flows dividends if any depending on profits future price of stock no guarantees of dividends (except preferred stocks) no maturity Discount rate risk appropriate rate of return of the investment

16. Valuation of common stock - types

    single holding period zero growth constant growth non-constant growth

17. Common stock: single holding period

    take present value future value is dividend + price

18. Common stock: Zero growth

    dividend is constant can be treated as perpetuity PV = Dividend / R

19. Common stock: constant growth

    dividends grow with constant time of g Dt=D0∗(1+g)tD_t=D_0*(1+g)^tDt​=D0​∗(1+g)t To calc present value: P0=D1R−gP_0=\frac{D_1}{R-g}P0​=R−gD1​​ For P6 we need D7 which we get with Dt Yield: R=D1P0+gR=\frac{D_1}{P_0}+gR=P0​D1​​+g R = dividend yield + capital gains yield Use PV function in excel g can be 0

20. R = dividend yield + capital gains yield

    Dividend yield: and equity's expected cash dividend by its current price Capital gains yield: the dividend growth rate

21. Common stock: non-constant growth

    constant or arbitrary dividends for the first few years becomes perpetual growth in the last year before perpetual growth I receive my last dividend plus the value the perpetual growth will mean to mean in that year I take NPV of the years