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COMM 121 > Chapter 6 Bonds > Flashcards

Chapter 6 Bonds Flashcards

1
Q

Zero-Coupon Bonds

A

A single payment at a fixed future date.

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2
Q

Maturity Date

A

The date when the issuer of the bond makes the last payment.

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3
Q

Face Value

A

The payment at maturity.

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4
Q

Coupon

A

Payments at fixed dates.

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5
Q

Clean Price

A

The quoted price.

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6
Q

Dirty Price

A

The price actually paid including accrued interest.

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7
Q

Consols

A

Bonds that never stop paying a coupon with no final maturity date.

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8
Q

Which government still commits to giving out consols even during hard times?

A

English Government

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9
Q

Discount

A

When the present value is less than face value.

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10
Q

Premium

A

When the present value is higher than face value.

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11
Q

Yield To Maturity

A

The rate of return that the holder is earning on the bond.

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12
Q

Holding Period Return

A

The total return received from holding an asset or portfolio.

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13
Q

Shares of Capital Stock

A

Residual claims to after-tax earnings or to the firm’s asset if there’s dissolution.

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14
Q

Preferred Shares

A

Priority in dividend payments and liquidation (over common shareholders) but no voting rights.

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15
Q

Common Shares

A

Dividends for an ongoing firm and control over firm’s decisions.

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16
Q

Dividends

A

A distribution of the company’s earnings.

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17
Q

Capital Gains

A

Share price appreciation.

18
Q

Zero Growth Dividend Model

A

Assumes that the dividend will remain at the same level forever.

19
Q

Constant Growth Dividend Model

A

Assumes that dividends will grow at a constant rate forever.

20
Q

Differential Growth Dividend Model

A

Estimate the future dividends in the foreseeable future, estimate the future stock price and compute the total PV of estimated future dividends.

21
Q

Growth Rate

A

Retention Ratio x Return on Earnings (Historical ROE)

22
Q

Payout Ratio

A

Dividends/Earnings

23
Q

Dividend Discount Model Concerns

A
  • What if firms don’t pay dividends?
  • The model is well-specified if r >g
  • if g > r than assume differential growth
  • Very hard to estimate
24
Q

Cash Cow

A

EPS = DIV, a company with a level stream of earnings per share in perpetuity.

25
Q

NPV of Growth Opportunities

A

The sum of the firm value given a 100% dividend payout ratio and net present value of growth opportunities (NPVGO)

26
Q

Dividend Discount Model

A

Use TVM tools to value the firm’s equity as a function of its expected dividend distributions.

27
Q

Relative Valuation: Price Earnings Ratio

A
  • Values a company by comparing it with that of publicly traded companies in the same industry.
  • Often the last 4 quarters’ earning are used.
28
Q

Growth Stocks

A

Firms whose shares at high multiples and with value concentrated in NPVGO.

29
Q

Value Stocks

A

Firms whose shares sell at low multiples and with value concentrated in cash cow.

30
Q

Limitation of P/E

A
  • Uninformative when companies have negative or very low, earnings
  • One year’s earning can fall, but a stock price is a function of many years.
31
Q

Price/Cash Flow

A

Cash Flow = Net Income + Depreciation

32
Q

Price/Sales

A

Current stock price over annual sales per share.

33
Q

Price/Book

A

Current price over book value of equity.

Book Value = Assets - Liabilities

34
Q

Spot Interest Rate

A

The interest rate fixed today on a loan today.

35
Q

Forward Interest Rate

A

A hypothetical interest rate that is specified now for a loan that will occur in the future.

36
Q

Expectations Theory

A

Investors set interest rates so that the forward rate equals the spot rate expected at that time.

37
Q

Liquidity Preference Theory (Risk Avoidance Theory)

A

Investors demand a “risk premium” to hold riskier longer-term debt instrument.

38
Q

Market Segmentation Theory

A
  • Separate markets exist for securities of different maturities.
  • Each market determines a rate based on supply/demand forces
39
Q

Upward Sloping Yield Curve

A

Long-Term Rates > Short-Term Rates

40
Q

Downward Sloping Yield Curve

A

Short-Term Rates > Long-Term Rates

41
Q

Flat Yield Curve

A

Short-Term Rates = Long-Term Rates

42
Q

Humped Yield Curve

A

Medium-Term rates are higher than Short-Term and Long-Term rates

COMM 121 (2 decks)

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