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Year 1 - Accounting and Finance > finance lec 6 - valuing bonds and shares > Flashcards

finance lec 6 - valuing bonds and shares Flashcards

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1
Q

what is a issuer/borrowe

A

person who issues/sells bond

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2
Q

what is the purpose of a bond

A

borrowing money today for the purpose of future payments

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3
Q

who is responsibble for future payments of the bond

A

isssuer

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4
Q

what is issue date

A

date bond 1st issued to the market

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5
Q

bonds are issued for the first time by the borrower in which market

A

primary market

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6
Q

when issued for fisrt time in primary markets how does issuer receive money

A

directly from investors

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7
Q

maturity date

A

latest date the owner of the bond can claim teh cashflows associated with the bond

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8
Q

what is a tenor

A

a fixed measure of time over which you as the issuer have the commitment to make these payments

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9
Q

how do we calculate the tenor

A

maturity date - issue date

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10
Q

how do we describe the tenor

A

fixed

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11
Q

what does tenor being fixed mean

A

no matter the point in time youre standing this is still the length of how long cf paid for

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12
Q

time to maturity

A

time left until maturity

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13
Q

what can time to maturity do

A

change

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14
Q

why can time to maturity change

A

as time goes on time to maturity decreases

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15
Q

principal value aka what 3 other names

A

par

face

nominal

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16
Q

what is the principla value

A

what you pay at issue date and the maturity of the bond

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17
Q

most bonds issued in multiples of

A

10

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18
Q

when a bond first issued what value is it issued at

A

nominal

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19
Q

after bond is issued value becomes a function of the

A

interest rate

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20
Q

we dont care too much about the face value unless

A

it was bought on the issue date

cause that’s not what you pay if you buy bond after the issue date

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21
Q

interest /coupon rate

A

reward you get on investment

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22
Q

coupon rates are always expressed in x terms but payments may not always be made x

A

annual terms

annually

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23
Q

are coupon rates fixed or floating

A

fixed

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24
Q

in this unit what kind of payment do we assume

A

annual

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25
Q

coupon payment equation

A

coupon rate x face value

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26
Q

space

A
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27
Q

what is the owner of a bond entitled to

A

a fixed set of cash payments in the future

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28
Q

owner is known as

A

bond holder/lender

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29
Q

what is a redeemable bond

A

bond where at maturity you get the nominal value

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30
Q

what is an iredemmable bond

A

bond where we only receive coupon repayment but never receive the face value

31
Q

iredeemable bonds are very

A

rare

32
Q

how many streams of cf do we have when we talm bout a bond

A

annual cf of coupon rate all years till maturity - interest paid annually during life of bond

single cf of nominal value - principal repaid on redemption redeemable bond

33
Q

value of bond =

A

value of future cf in PV

34
Q

If someone is promising us £100 a year from now what are we willing to pay

A

PV of future cf based on appropriate DR

pay a price less than this - great as paying less than getting so positive NPV

35
Q

if someone promising us £100 a year from now what are we NOT willing to pay

A

A higher price than PV of future cf as we’ll be destroying value paying more than we are getting

36
Q

what is valuation when we talking about time money

A

PV of future CF

37
Q

If the rate used to calculate the value is equal to the market rate what does this mean

A

value will be that of the market value

38
Q

what are the columns when working out the bond repayment

A

at issue
y1
y2
y3
y4
etc

39
Q

what are the rows when working out the bond repayment

A

bondholder pays (company recieves)

bondholder recieves (company pays )

bondholder recieves (copmpany repays

40
Q

what are the 3 steps to working out bonds

A

layout cf associated w bond - issue date that the company pays

once own bond entitled to future cf - continue to recieve this till last year

at end of life of bond - recieve nominal val of bond so copmany pays nominal value

41
Q

what is differnce between bond and loan cause they pretty similar

A

bodns are tradeable in exchanges

42
Q

when can you buy and sell bonds

A

at any point during till maturity - clariy

43
Q

observation – present value of cashflows

A
44
Q

if a 5% coupon rate vond at time of date issued is 100 qhat does this mean teh DR is

A

5%

or 5% is the reward ?

45
Q

if our return is 5% and our discount rate is 3% what can we expect

A

the value we will end up with is greater than 100

as we gettting rewarded w 5% but only getting dicountes by 3 %

discount is less than getting rewarded/returned/par value - so expected bigger valuei

46
Q

if ROR is 5% and DISCOUNT RATE is 8% what can we expect

A

That par value will be less than return

becausse we getting reward w 5& but getting disocunted much larger

the bond value will be less if dicosint rate is greater than coupon rate

47
Q

if bond valued at a greater than par value the bond is bing traded ata

A

premium

48
Q

if bond valued at a lower than par value it is bing traded at a

A

discount

49
Q

if we see discount rate is greater than coupon rate what can we expect

A

lower thn par value bond

50
Q

a £5 regualr payment for bond cna be considered an

A

annuity

51
Q

why can a £5 regular payment for a bond be consdierd an annuity

A

as its a fixed , regular frequency payment for a limited POT

52
Q

So when working out PV of bond what should we do aka formula

A

AF

Payment/cf * AF + Discount factor

(coupon rate/interest paid * AF) + (prinicpal repaid x DF )

53
Q

how do we estimate that our PV of bond calculation is correct

A

check if discount rate higher or lower than the coupon rate

and then see if the umber below or above pr value

54
Q

bond value

A
55
Q

what do we use to get the market price

A

market rate

56
Q

what is todays mkt value =

A

PV of future cf disocunted at market rate of inteerest

57
Q

if the mkt rate is 3% a bond payingna greater than coupon rate what do we expext

A

higher than it nominal value

58
Q

YTM

A
59
Q

Yield to maturity aka

A

ROR

cost of capital

reward

ir

60
Q

what is YTM

A

rate of return investor will earn

if the bond is held to maturity or

*Rate that sets PV of future cf = mkt price of bond

61
Q

YTM aka

A

bond holders expected rate of return

62
Q

what do we need to w/o YTM

A

coupon

nominal value

time to maturity

current market value

63
Q

YTM =

A

DR = PV of futrre cashflows w current market price of the bond

64
Q

YTM aka the what of cashflows

A

IRR

65
Q

when we talkign about bonds what do we say instead of yield

A

return

66
Q

what dotwo rates do we need when calcualting IRR

A

rate that give us -ve NPV

rate that gives us +ve NPV

TAKING CF INTO ACCOUTN

67
Q

IRR CALCULATION

A

r1+ IRR1/IRR1 - IRR2 * (r2-r1)

68
Q

how do we work out out current yield

A

coupon payment/ current market price of bond

actual coupon payment as in 1000 * 8%

69
Q

how do we work out coupon rate

A

coupon payment / nominal value of bond

70
Q

when would you not care aobut the nominal pruice and what do you care about instead

A

unless you ought bond when 1st issued

as you dont pay for nominal price you pay for the market price

71
Q

teh current yield (or amybe coupon yield) doesn’t take into account

A

capital gained or lsot in sale

72
Q

what takes into account capital gained or lost

A

total yield

73
Q

how do we work out total yield

A

coupon recieved + capital gained(or lsot)from sale of bond/ initial investment

(*100)

74
Q

do we neeed more fc ?

A

Year 1 - Accounting and Finance (49 decks)

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