Bond Valuation

Question 1

A bond with no collateral is called

Answer 1

Debenture

Question 2

What are the 2 types of inflation

Answer 2

• Cost Push Inflation

- Demand Pull Inflation

Question 3

Inflation when cost of materials and labor goes up is

Answer 3

cost push inflation

Question 4

Inflation when consumers are willing to pay higher prices for a product or service is

Answer 4

Demand Pull inflation

Question 5

What are the 2 main ways to maximize shareholder wealth

Answer 5

1. Price appreciation of stock

2. Paying them dividends

Question 6

How can a company increase dividends?

Answer 6

Need to increase sales, or reduce expenses (need to increase net profit)

Question 7

In an effort to increase Sales to increase Net profit to increase dividends, a company increased it’s price of product. Does this necessary increase Sales?

Answer 7

No - due to price elasticity, quantity could decrease so much that revenue decreases

Question 8

With Schedule 13_D, a shareholder who acquires __ % of a company’s outstanding shares has ___ to notify the SEC of their ___

Answer 8

5%
10 days
Intention

Question 9

If you have a salary of $80k, and spend $60k in a year, your what is 75%

Answer 9

APC: average propensity to consume

Question 10

If you get a $10k raise, and save $8k of it, then your what is 80%

Answer 10

MPS - Marginal propensity to Save

Question 11

From a standpoint of spending vs savings, investing is considered

Answer 11

Savings

Question 12

What are the 2 ways that a company can raise money in the financial market

Answer 12

1. in the Equity Market

2. in the Debt Market

Question 13

Why would a company choose to seek funding in the debt market rather than the quity market

Answer 13

in the equity market, you would be required to pay dividends, which are not tax deductible.
However interest paid on borrowed money IS tax deductible

Question 14

Seeking funding in the equity market means you are

Answer 14

issuing shares/stock. Could be preferred or common

Question 15

A medium term loan is

Answer 15

1 to 5 years

Question 16

A short term loan is

Answer 16

1 year or less

Question 17

Bonds are typically ____ term loans, issued for…

Answer 17

long term

10, 20, 30 years etc

Question 18

Why would a major company seek funding for major financial needs in the bond market rather than a commercial bank?

Answer 18

1. no single bank could fund it (could be in the Billions)
2. Interest rate from bond market is relatively cheaper (25 - 50 basis points)
3. option of borrowing different types of bonds depending on specific situation
4. bond market asks for less documentation
5. banks are not interest in long term commitments

Question 19

1 basis point =

Answer 19

0.01%

Question 20

Corporate bonds

Answer 20

Debt security issued by a firm

Question 21

Callable Bonds are bonds where…

Answer 21

the issuer may redeem before it reaches the stated maturity date.

Question 22

Typ

Question 23

Things a company may use funding from bonds for:

Answer 23

1. buying new equipment
2. investing in R&D
3. paying shareholder dividends
4. buying back their own stock
5. financing mergers and acquisitions

Question 24

A bond with a coupon rate of 0% is a

Answer 24

Zero Coupon Bond

Question 25

types of bonds:

Answer 25

• callable bonds
• convertible bonds
• zero coupon bonds
• sinking fund bond
• high yield bond
  MORE

Question 26

Coupon Value =

Answer 26

Coupon Rate * Par Value of Bond

Question 27

Default par value of a bond is

Answer 27

$1000

Question 28

Value of Bond =

Answer 28

= PV of Interest + PV of Principal =

= PVIFACoupon + PVIFPrincipal

Question 29

If the required rate of return in the market is greater than the coupon rate, expect bond value (price) to be ____

Answer 29

less than par value

Question 30

Present Value of the Bond is also…

Answer 30

the price of the bond in the debt market

Question 31

$1000 par value bond, coupon rate is 6%, matures in 20 years, pays semi annually, and required rate of return is 4%, what is the bond value?

Answer 31

N = 2*20 = 40 periods
Coupon = 6%/2 * $1000 = $30
PVIFA [40, i = 2%] = 27.355
PV of Interest = 27.355 * 30 = $820.65
PV of Principal = 0.453 * $1000 = $453
Vb = 1273.65

Question 32

Investment grade bonds have a rating of

Answer 32

BBB and up

BBB = B3

Question 33

Price of a zero coupon bond =

Answer 33

Par Value * PVIF

Question 34

Accounts receivable are collected, this affects

Answer 34

Operating cash flow