finance lec 6 - valuing bonds and shares

Question 1

what is a issuer/borrowe

Answer 1

person who issues/sells bond

Question 2

what is the purpose of a bond

Answer 2

borrowing money today for the purpose of future payments

Question 3

who is responsibble for future payments of the bond

Answer 3

isssuer

Question 4

what is issue date

Answer 4

date bond 1st issued to the market

Question 5

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

Answer 5

primary market

Question 6

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

Answer 6

directly from investors

Question 7

maturity date

Answer 7

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

Question 8

what is a tenor

Answer 8

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

Question 9

how do we calculate the tenor

Answer 9

maturity date - issue date

Question 10

how do we describe the tenor

Answer 10

fixed

Question 11

what does tenor being fixed mean

Answer 11

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

Question 12

time to maturity

Answer 12

time left until maturity

Question 13

what can time to maturity do

Answer 13

change

Question 14

why can time to maturity change

Answer 14

as time goes on time to maturity decreases

Question 15

principal value aka what 3 other names

Answer 15

par

face

nominal

Question 16

what is the principla value

Answer 16

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

Question 17

most bonds issued in multiples of

Answer 17

10

Question 18

when a bond first issued what value is it issued at

Answer 18

nominal

Question 19

after bond is issued value becomes a function of the

Answer 19

interest rate

Question 20

we dont care too much about the face value unless

Answer 20

it was bought on the issue date

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

Question 21

interest /coupon rate

Answer 21

reward you get on investment

Question 22

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

Answer 22

annual terms

annually

Question 23

are coupon rates fixed or floating

Answer 23

fixed

Question 24

in this unit what kind of payment do we assume

Answer 24

annual

Question 25

coupon payment equation

Answer 25

coupon rate x face value

Question 26

space

Question 27

what is the owner of a bond entitled to

Answer 27

a fixed set of cash payments in the future

Question 28

owner is known as

Answer 28

bond holder/lender

Question 29

what is a redeemable bond

Answer 29

bond where at maturity you get the nominal value

Question 30

what is an iredemmable bond

Answer 30

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

Question 31

iredeemable bonds are very

Answer 31

rare

Question 32

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

Answer 32

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*

Question 33

value of bond =

Answer 33

value of future cf *in PV*

Question 34

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

Answer 34

PV of future cf based on appropriate DR pay a price less than this - great as paying less than getting so positive NPV

Question 35

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

Answer 35

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

Question 36

what is valuation when we talking about time money

Answer 36

PV of future CF

Question 37

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

Answer 37

value will be that of the market value

Question 38

what are the columns when working out the bond repayment

Answer 38

at issue y1 y2 y3 y4 etc

Question 39

what are the rows when working out the bond repayment

Answer 39

bondholder pays (company recieves) bondholder recieves (company pays ) bondholder recieves (copmpany repays

Question 40

what are the 3 steps to working out bonds

Answer 40

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

Question 41

what is differnce between bond and loan cause they pretty similar

Answer 41

bodns are tradeable in exchanges

Question 42

when can you buy and sell bonds

Answer 42

at any point during till maturity - clariy

Question 43

observation -- present value of cashflows

Question 44

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

Answer 44

5% or 5% is the reward ?

Question 45

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

Answer 45

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

Question 46

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

Answer 46

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

Question 47

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

Answer 47

premium

Question 48

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

Answer 48

discount

Question 49

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

Answer 49

lower thn par value bond

Question 50

a £5 regualr payment for bond cna be considered an

Answer 50

annuity

Question 51

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

Answer 51

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

Question 52

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

Answer 52

AF Payment/cf * AF + Discount factor (coupon rate/interest paid * AF) + (prinicpal repaid x DF )

Question 53

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

Answer 53

check if discount rate higher or lower than the coupon rate and then see if the umber below or above pr value

Question 54

bond value

Question 55

what do we use to get the market price

Answer 55

market rate

Question 56

what is todays mkt value =

Answer 56

PV of future cf disocunted at market rate of inteerest

Question 57

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

Answer 57

higher than it nominal value

Question 58

YTM

Question 59

Yield to maturity aka

Answer 59

ROR cost of capital reward ir

Question 60

what is YTM

Answer 60

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

Question 61

YTM aka

Answer 61

bond holders expected rate of return

Question 62

what do we need to w/o YTM

Answer 62

coupon nominal value time to maturity current market value

Question 63

YTM =

Answer 63

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

Question 64

YTM aka the what of cashflows

Answer 64

IRR

Question 65

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

Answer 65

return

Question 66

what dotwo rates do we need when calcualting IRR

Answer 66

rate that give us -ve NPV rate that gives us +ve NPV TAKING CF INTO ACCOUTN

Question 67

IRR CALCULATION

Answer 67

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

Question 68

how do we work out out current yield

Answer 68

coupon payment/ current market price of bond actual coupon payment as in 1000 * 8%

Question 69

how do we work out coupon rate

Answer 69

coupon payment / nominal value of bond

Question 70

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

Answer 70

unless you ought bond when 1st issued as you dont pay for nominal price you pay for the market price

Question 71

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

Answer 71

capital gained or lsot in sale

Question 72

what takes into account capital gained or lost

Answer 72

total yield

Question 73

how do we work out total yield

Answer 73

coupon recieved + capital gained(or lsot)from sale of bond/ initial investment (*100)

Question 74

do we neeed more fc ?