How to Value Bonds and Stocks Flashcards
A bond is a legally binding agreement between a
______ (bond ______) and a _____ (_______).
A bond is a legally binding agreement between a
borrower (bond issuer) and a lender (bondholder).
A bond specifies the ____ amount of the ____.
A bond specifies the principal amount of the loan.
A bond specifies the _____ and _____ of the ____ _____:
• In dollar terms (_____-rate borrowing)
• As a formula (______-rate borrowing)
A bond specifies the size and timing of the cash flows:
• In dollar terms (fixed-rate borrowing)
• As a formula (adjustable-rate borrowing)
First Principle:
Value of financial securities = ____ of ______ ______ cash
flows
First Principle:
Value of financial securities = PV of expected future cash
flows
To value bonds and stocks we need to:
– Estimate ___ ___ ___:
• ______
• ______
To value bonds and stocks we need to:
– Estimate future cash flows:
• Size (how much) and
• Timing (when)
To value bonds and stocks we need to:
– ________ future cash _____ at an appropriate rate.
• The rate should be appropriate to the _____ presented by the ______.
To value bonds and stocks we need to:
– Discount future cash flows at an appropriate rate.
• The rate should be appropriate to the risk presented by the security.
Bond value is determined by the present value of the
______ ____ and ____ ____.
Bond value is determined by the present value of the
coupon payments and face value.
Discount rates are ______ related to present (i.e., bond)
values.
Discount rates are inversely related to present (i.e., bond)
values.
If you know the price of a bond and the size and timing of cash flows, the yield to maturity (YTM) is the ______
rate.
If you know the price of a bond and the size and timing of cash flows, the yield to maturity (YTM) is the discount
rate.
Pure Discount Bonds:
Make ____ periodic _____ payments (coupon rate =
____%)
Pure Discount Bonds:
Make no periodic interest payments (coupon rate =
0%)
Pure Discount Bonds: The entire YTM comes from the difference between the _____ price and the ____ value.
Pure Discount Bonds: The entire YTM comes from the difference between the purchase price and the face value.
Pure Discount Bonds: Cannot sell for more than ____ value
Pure Discount Bonds: Cannot sell for more than face value
Pure Discount Bonds: Sometimes called _____, ____ discount bonds, or
_____ issue discount bonds (OIDs)
Pure Discount Bonds: Sometimes called zeroes, deep discount bonds, or
original issue discount bonds (OIDs)
Pure Discount Bonds: _____ Bills and _______-only Treasury strips are
good examples of zeroes.
Pure Discount Bonds: Treasury Bills and principal-only Treasury strips are
good examples of zeroes.
Pure Discount Bonds: Promise a _____ payment at a ____ future date.
Pure Discount Bonds: Promise a single payment at a fixed future date.
Information needed for valuing pure discount bonds:
– Time to maturity (T) = ___ - ____
– (F)
– (r)
Information needed for valuing pure discount bonds:
– Time to maturity (T) = Maturity date - today’s date
– Face value (F)
– Discount rate (r)
Level Coupon Bonds: Make _____ ____ payments in addition to the _____ value.
Level Coupon Bonds: Make periodic coupon payments in addition to the maturity value.
Level Coupon Bonds: The payments are ____ each period. Therefore, the
bond is just a combination of an _____ and a terminal (_____) value.
Level Coupon Bonds: The payments are equal each period. Therefore, the
bond is just a combination of an annuity and a terminal (maturity) value.
Level Coupon Bonds: Coupon payments are typically ______
Level Coupon Bonds: Coupon payments are typically semiannual
Information needed to value level-coupon bonds:
– (T)
– (C) and (F)
– _____ rate
Information needed to value level-coupon bonds:
– Coupon payment dates and time to maturity (T)
– Coupon payment (C) per period and Face value (F)
– Discount rate
Value of a Level-coupon bond
= PV of coupon payment _____ + PV of ____ value
Value of a Level-coupon bond
= PV of coupon payment annuity + PV of face value
Consols: bonds without a ____ _____.
Consols: bonds without a final maturity.
British consols pay a ____ amount (i.e., ___) every
period ____.
British consols pay a set amount (i.e., coupon) every
period forever.
Consols are an example of _____.
Consols are an example of perpetuity.
Bond prices and market interest rates move in
______ directions.
Bond prices and market interest rates move in
opposite directions.
A level-coupon bond trades in the following ways:
1. At the face value if the coupon rate is _____ to the
marketwide interest rate.
2. At a discount if the coupon rate is ____ than the
marketwide interest rate.
3. At a premium if the coupon rate is _____ than the
marketwide interest rate.
A level-coupon bond trades in the following ways:
1. At the face value if the coupon rate is equal to the
marketwide interest rate.
2. At a discount if the coupon rate is less than the
marketwide interest rate.
3. At a premium if the coupon rate is more than the
marketwide interest rate.
