Exam 2 Flashcards
What is a Bond
Debt contract - interest only loan - that you will pay later on in the future
What is par value?
It is the face amount of the bond paid at maturity
What is the coupon rate?
It is the stated interest - usually YTM at issue
How do you calculate coupon payment?
Coupon rate x par value
How do you calculate coupon yield?
Current yield x par value
What is the maturity date of a bond
It is the years until the bond must be repaid
What is yield to maturity
Market required rate for bonds of similar risk and maturity - basically the coupon rate at issue - noted as APR
How do you price bonds on the calculator
2nd > 9 > bond
SDT = actual settlement date (day you receive bond when buy)
CPN = ANNUAL RATE IN PERCENTAGE (1=100%) - COUPON RATE
RDT = BOND MATURITY DATE
RV = REDEMPTION VALUE A % OF PAR - HOW MUCH YOU GET AT maturity
ACT = ACTUAL NUMBER OF DAYS (360)
2/Y = 2/Y OR 1/Y - HOW MANY COUPON PER YEAR (PERIODS)
YLD = YIELD TO REDEMTION -
CPT = COMPUTE
PRI = DOLLAR PRICE PER 100 PAR VALUE
AI = ACCRUED INTEREST (ADD TO PRI FOR DIRTY PRICE)
Discount bond
Bond price below par value
Coupon rate below YTM
Premium bond
Price of bond above par value
Coupon higher than yield to maturity
How to find Pv of bond
1000 > fv
1000 x .1 > pmt
Maturity 5 years > n = 5
Ytm = 11% > i/y = 11
Cpt > pv (compute pv)
-963.04
What is price risk
Change in price due to changes in interest rates
Long term bonds have more price risk than what
Short term bonds
Low coupon rate bonds have more proce risk than what
High coupon rate bonds
What is reinvestment rate risk
Uncertainty concerning rate at which cash flows can be reinvested
Short term bonds have more reinvestment risk than
Long term
High coupon rate have more reinvestment risk than
Low rate bonds
How do you compute yield to maturity
You enter pmt and fv (they must be same sign)
Pv opposite sign
Cpt i/y for yield (YTM)
Debt v equity: debt
Not ownership interest
No vote
Interest tax deductible
Creditors can get you
Can lead to financial distress
Debt v equity: equity
Ownership interest
Common stock holders vote to elect bod
Dividends not tax deductible
Dividend liability of firm
All equity firm cannot go bankrupt
Bond indenture
Deed of trust - contract bw issuing company and bondholders include
Special calls
Collateral bonds
Secured by financial security
Mortgage
Secured by real property land
Debentures
Unsecured bond
Notes
Unsecured debt with original maturity less than 10
Which bonds have high coupon rates with everything else equal?
A bond with a longer maturity will usually have higher rate than short term
Bond rating
High-grade
Medium
Low
Very low
High grade bonds
Pay is extremely strong to strong
Medium grade bonds
Strong but more susceptible to change - addiquat
Government bonds include
Municipal securities
Treasury securities
What are municipal securities
Debt of the state and local government
Treasury securities are what
Federal government debt
Types of treasury securities
Treasury bills
Treasury notes
Treasury bonds
Treasury bill
Pure discount bond
Original maturity one year or less
Treasury note
Coupon debt
Maturity one to ten year
Treasury bond
Coupon debt
Maturity greater than ten year
Zero coupon bond
Coupon rate zero no periodic
Difference between purchase price and par value (cap gains)
interest payment
Zero/deep discount
Treasury bill ans us saving bond
Floating rate bond
Coupon rate floats depending in some index value
Less price risk
Bond markets are
Primary over the counter transaction with dealers
Quote bind price equals what
Clean price
Net accused interest
Invoice price equals what
Dirty price or full price
Price actually paid
With accrude interest
Accrued interest is what
Interest earned since last coupon payment is owerd to bond seller at time of sale
Fisher effect is what
Relationship bw time to maturity and yield all else equal
1+R = (1+r)(1+h)
R= quotes rate
r=real rate
h=inflation rate
Approximation R=r+h
If you own a stock you are a what
Owner of the corp
You can receive cash from stocks by
Dividens and selling shares
Price of stock is the present value of
Dividends cash income
Selling = capital gains
Find npv of stock
Do CF on calculator
Perpetuity means what
Equal number of cash flow given a rate of return
Constant dividend growth/zero growth
Firm pays constant dividend
Preferred stock
Price computed using the perpetuity formula
Perpetuity formula
P0=dividend/rate
Constant dividend growth
Firm will increase dividend by cosntant percent every period
