Bond And Stock Valuations Flashcards
What is the current yield and what is the formula?
Measures a bond yield based on its annual interest payments and current market price
CY = annual interest payments / current market price
What is the yield to maturity? (YTM)
The internal right of return for cash flows associated with the bond, including the purchase price, coupon, payments, and maturity value
How do you figure the yield to maturity?
How do you figure yield to call?
How often do bonds typically pay interest?
Semi annually, unless otherwise stated
If interest rates increase bond prices will
Decrease
If interest rates decline bond prices will
Increase
Bonds with longer terms are subject to more of what than bonds with shorter terms
Price volatility with changing interest rates
An upward revision on a bond rating will cause the market yield on the bond to do what
Decline reflecting the bond improved quality
A downward revision of a bonds rating will cause the market yield on the bond to do what
Increase reflecting the bonds decline in quality
What bonds are the most price sensitive to interest rate changes?
Bonds with low coupon rates and long maturity
What would the most volatile bond be?
Long-term zero coupon bond
What are yield curves?
Yield curves reflect rates offered by treasury instruments for various maturities
Yield curves have a tendency to slope in what direction
Upward and outward, denoting fat as the maturity of bonds increases, the corresponding interest rate yields increase
What does it mean if a yield curve is flat?
No difference in the yield relative to maturity
What does it mean if a yield curve is inverted
That current short term borrowing cost are higher than long-term borrowing cost
If a yield curve is flat and investor should do what
Buy long maturity bonds, only if they are confident of long-term rates falling in the future
What should investors do if the yield curve is inverted
Should favor longer maturities, inverted yield curves will correct to normal and short rates will fall farther than long rates
What should investors do if you have a steeply sloped yield curve
Should avoid longer maturity
What is duration?
Determines the weighted average number of years until an investment is recovered
How do you solve for duration?
The coupon rate of a bond and the duration of a bond have what sort of relationship
Inverse
Zero coupon bonds will always have a duration equal to what
Time to maturity
A bond with coupon payments will always have a duration less than it’s what
Time to maturity because some of its cash flows occur before maturity
As the yield to maturity increases the duration will what
Decline
What is convexity?
Refers to the degree to which duration changes as a result of changes in the yield to maturity, large convexity implies a large change in duration
Convexity is likely to be the greatest with the following types of bonds
Low coupon bonds
Long maturity bonds
Low yield to maturity bonds
What is the formula for estimating bond price changes using duration?
Will not be effective for large changes in interest rates
What is the formula for stock holders equity, sometimes referred to as retained capital?
Asset - Liabilities
What is the intrinsic value of a stock?
What is the formula?
Intrinsic value of a stock is the present value of future cash flows discounted at a risk adjusted interest rate also referred to as the investors required return
What is the constant growth dividend discount model?
What is the formula?
Used to determine the price for a security in which dividends are growing at a constant rate
The constant growth dividend discount model is best used for what type of companies
Well established
How do you solve a problem with the constant growth dividend discount model if it shows a growth rate of a dividend?
How do you measure a multi stage (variable) growth discount model?
What is the discounted free cash flow model and what is the formula?
Models used when a firm is not currently paying a dividend
Does book value depict an accurate measure of the value of a company?
No
What is the income capitalization approach when valuing real estate?
Bases the value of the property on the income that can be generated from the property
A property that recently sold for $12 million and generated net income of 2.16 million per year has an implied capitalization rate of what
18%
$2.16 million / $12 Million
Net operating income (NOI) Is generally used as the measure of income because it does not consider what?
Mortgage payments or depreciation
If a property has sold for $1 million and generates net operating income of 100,000 per year, and what is the implicit capitalization rate?
10%
$100,000 / $1 million
