Book 1_Quan_Time value of money Flashcards
- Pure discount
Zero-coupon bond
- Yield to maturity
the time until maturity
- Fixed-coupon bond
+ Pay a fixed-coupon annually
+ the entire principal is paid to the investor on the maturity date
- Coupon rate
a percentage of the face value
- perpetual bonds (perpetuities):
PV of a perpetuity = payment/r
- An amortizing bond or annuity
+ one that pays a level amount each period, including its maturity period
+ annuity payment = (r x PV) /(1-(1+r)^-t)
- Preferred stock
+ Dividend = percentage of its par value
+ Required return
+ Preferred stock value = Dp/kp
Dp: dividend per period
kp: the market’s required rate of return on the preferred stock
- Common stock
Vo= D1/(ke-gc)
Vo: value of this period
D1: divident expected in the next period
ke: required return on common equity
gc: constant growth rate of dividends
Implied returns and cash flow additivity
- Impied returns => Calculate the rate of returns from other factors
- cash flow additivity principle => refers to the fact that the PV of any stream of cash flows equals the sum of the PVs of the cash flows
- Forward Interest Rates:
the interest rate for a loan to be made at some future date
o (1 + S3 ) 3 = (1 + S1 )(1 + 1y1y)(1 + 2y1y)
1y1y: one-year interest made 1 year from now
2y1y: one-year interest made 2 years from now
- Forward Currency Exchange Rates
: the price of one country’s currency in terms of another country’s currency
forward/spot = (1+interest rate of price cur/ (1+interest rate of base cur)
- Option Pricing Model
+ An is the right, but not the obligation, to buy or sell an asset on a future date for a specified price. The right to buy an asset is a call option, and the right to sell an asset is a put option
A binomial model
is based on the idea that, over the next period,
some value will change to one of two possible values
+ A value for the underlying asset
+ An exercise price for the option
+ Returns of underlying assets
+ The risk-free rate over the period
