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Finance > Bonds 2 and Stock Valuation > Flashcards

Bonds 2 and Stock Valuation Flashcards

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1
Q

A Yield Curve shows the relationship between

A

Interest rate and Time

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2
Q

Bonds are traced by a

A

Serial Number

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3
Q

This type of bond can be called back at the discretion of the issuing company

A

Callable bond

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4
Q

If you expect interest rates to decrease in the near future, the economy is described by a ___ curve

A

Downward Yield

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5
Q

When a company makes a decision to call back a bond, they have to do 3 things:

A
  1. Predict a downward yield curve/future interest rates
  2. Hire and Investment Bank
  3. File Shelf Registration with the SEC 30 days in Advance
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6
Q

Interest in Arears is a ____ in a balance sheet

A

Current Liability

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7
Q

What 3 things does the bondholder receive if a company calls back a bond they’re holding?

A
  1. Par Value
  2. Call Premium
  3. Interest in Arears
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8
Q

Accrued interest on a bond is also called…

A

Interest in arears

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9
Q

Call Premium =

A

Callable Price - Par Value

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10
Q

This type of loan will likely be taken out by a company when calling in bonds

A

bridge loan

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11
Q

What is used for collateral of bridge loans?

A

The best parts of your liquid assets

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12
Q

Bridge loans have ____ maturity

A

Short, 3 to 9 months

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13
Q

Many companies promise bondholders they won’t call back loans within…

A

3-5 years

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14
Q

A convertible bond is a bond which can be converted to _____ at the discretion of ______

A

Common Stock

Bondholder

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15
Q

Conversion Ratio of a convertible bond =

A

Par Value / Conversion price

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16
Q

The conversion ratio reporesents….

A

how many shares of common stock a bondholder will receive if they elect to convert

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17
Q

If a convertible bond has a par value of $1000 and a conversion price of $50, how many shares could the bondholder recieve?

A

20

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18
Q

Convertible bonds are usually…

A

Debentures

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19
Q

What are 3 negative aspects of convertible bonds

A
  1. High Conversion price
  2. Usually Debentures
  3. Coupon Rate is relatively low compared to other bonds in the market
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20
Q

These types of companies usually hold convertible bonds

A

High volatility, like high tech

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21
Q

A zero coupon bond doesn’t have a par value it has a ….

A

Maturity value

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22
Q

Even though bondholders of zero-coupon bonds do not receive any interest payments and no payout until maturity, they must do what

A

report their interest income to the IRS as though they had actually received an annual payment

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23
Q

Companies issuing zero coupon bonds must inform bondholder of what rate?

A

Implied interest rate

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24
Q

Do company’s report interest they didn’t actually pay to zero-coupon bonds annually?

A

Yes, the interest owed using the implied interest rate must be reported on their income statment

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25
Q

Pharmaceutical companies are likely to issue what type of bond

A

Zero coupon bond
(issued by companies that will make a lot of money in the future once new technologies are patented and in serial production)

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26
Q

Sinking fund bonds are issued by companies with a ____ outlook

A

Poor

Not god guarantee you’ll get par value back at maturity

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27
Q

Interest on sinking fund bonds is relatively ____ compared to standard bonds and you’ll receive ____ annually as well

A

Higher

Portion or the principal

28
Q

If a company issues $2billion of sinking fund bonds, $1000 par value each, 8% coupon rate, maturity of 20 years, how much will it pay out in the first year?

A

Coupon payment = $2 billion * 8% = $160 million
+
$2billion / 20 years = $100 million
= $260 million

29
Q

A high yield bond is an example of a

A

Debenture

30
Q

Interest on Muni bonds are exempt from what?

A

federal taxes

31
Q

What are the 2 types of Muni bonds?

A
  1. General Obligation Bond

2. Revenue Bond

32
Q

These types of muni bonds are used to finance a major public work

A

General Obligation bond

33
Q

What is the collateral repayment mechanism backing a general obligation bond?

A

ability to increase income taxes

34
Q

A revenue bond is used to finance

A

a profitable project (ex a turnpike)

35
Q

Municipal bonds are more beneficial to individuals in ____ income brackets

A

higher

36
Q

On a sinking fund bond, the amount of annual principal payment =

A

Amount borrowed (total amount of bonds) / maturity in years

37
Q

Given a municipal bond rate, what is the formula for converting to an equivalent rate of a corporate bond

A

Interest rate of Muni Bond / (1 - marginal tax rate) = equivalent interest of Corporate bond

38
Q

If you have a corporate bond with a 4.65% interest rate, and your marginal tax rate is 35%, what is the equivalent rate of a municipal bond?

A

4.65% * (1-35%) = 3.02%

39
Q

Peak, Trough, Growth and ____ are phases of the _____

A

Contraction

Business Cycle

40
Q

LBO stands for

A

Leverage Buyout

41
Q

When market value is < book value, then the stock is

A

undervalued

42
Q

7 conditions that should be met for a leverage buyout to happen. Company should:

A
  1. be well known with a well known product line
  2. be a mature business
  3. have a well known management team
  4. have small long term debt
  5. have a depressed stock price
  6. have multiple independent divisions
  7. have undervalued stock
43
Q

The high yield bond was invented by

A

Michael Milton

44
Q

What are some funding sources a company’s managers will use to prep for an LBO?

A
  1. pool their own money
  2. short term (ex 3 year) loan from bank syndication
  3. take out high yield bond
45
Q

after an LBO the company will be

A

private

46
Q

Perpetual bonds are typically issued by companies that…

A

don’t seem to have an expiration date on the horizon as far as the market is concerned

47
Q

The bond value of a perpetual bond =

A

Amount of Yearly Interest / Rate of required return

48
Q

What is the price of a perpetual bond with a par value of $1000, a coupon rate of 6%, when the the required rate of return of an investor is 8%?

A

Vb = $1000*6% / 8% = $750

49
Q

Stock valuation of preferred stock is very similar to…

A

perpetual bonds

50
Q

What is the value of a preferred stock (P0) with a dividend rate of 6%, when the investor requires a rate of return of 8% (K)?

A

Assume par = $100

P0 = D $/ K = $100*6% / 8% = 75

51
Q

What are the 3 models of valuating common stock?

A
  1. zero growth dividend model
  2. constant growth dividend model
  3. super normal growth dividend model
52
Q

The value of a common stock with a steady state annual dividend has this formula, the same as ____

A

Value of Stock = P0 = D / K = Amount of Annual Dividend / Required Rate of Return
Same as perpetual bond and preferred stock

53
Q

What is the formula for stock value of a common stock with a constant growth dividend?

A

P0 = Di / (K - g)

54
Q

If a common stock has a constant growth dividend, with a growth rate of 5%, and an initial dividend of $2, when market rate of return is 7%, what is the value?

A

Value = $2 / (7% - 5%) = $100

55
Q

A common stock with an initial dividend growth rate that will change to a 2nd after X number of years should be modelled by:

A

super normal growth dividend model

56
Q

ABC company currently pays a cash dividend of $2 (D0 = $2). This dividend will grow at an annual rate of g1 = 25% for the next 3 years. After which the dividend growth rate will be g2 = 8% forever. WHAT IS THE CURRENT VALUE of this stock (the PRICE) for an investor whose required rate of return is K = 10%

A

$165.45

57
Q

Fixed costs are those costs which

A

Stay the same regardless of production level

58
Q

rent, insurance, car registration fees, R&D, are examples of

A

fixed cost

59
Q

Variable costs are those costs which

A

increase as production level increases

60
Q

materials and labor are an example of

A

variable costs

61
Q

Is payment of dividends tax deductible for a company?

A

NO

62
Q

Owning common stock gives shareholders a ____ in the company

A

equity claim

63
Q

Some of this type of share are retained by the company

A

issued shares

64
Q

The average market beta =

A

1.0

65
Q

Why do companies set conversion price very high?

A

it would increase qty of outstanding shares and would dilute their EPS

Finance (9 decks)

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