l5&6 : capital raising & evaluation of securities Flashcards
why should we raise capital?
- achieve growth
- pay off debts
- mergers & acquisitions
how can we raise capital?
- angel finance (investors who seek high risk, high reward)
- non-securities debt (loans from bank)
- venture capital
- listing on the stock exchange
how can we raise capital by listing on the stock exchange?
process of listing on stock exchange is called intial public offering (IPO). through an IPO, a firm sells its shares to new investors which can raise capital.
the process involves hiring a number of advisors and choosing a method to conduct an IPO
what can you buy bonds in?
governments, local authorities, companies
give three other names for bonds.
gilts, stocks, debentures
what can you buy shares in?
companies (shareholders own the company)
give three other names for shares.
stocks, equity shares, ordinary shares
what are the four main features of a bond?
- face value
- coupon or coupon rate
- maturity
- yield
define face value in the context of bonds.
principal, nominal value, par value. most UK bonds have a face value of £100
define coupon rate in the context of bonds.
the % of face valur that the bond pays in interest each year
define coupon in the context of bonds.
the amount of interest
define maturity in the context of bonds.
the date when the issuer repays the face value
what happens to bond prices if the market rate increases?
bond prices falls. bond prices and market rates have an inverse relationship
what does it mean if a bond is priced at a discount?
bond price is lower than its par value. this is because coupon rate < interest rate.
what does it mean if a bond is priced at a premium?
bond price is higher than its par value. this is because coupon rate > interest rate.
what does volatility measure?
interest rate risk. measures the percentage change in bond price for a small change in interest rate
explain how the length of maturity of a bond affects price volatility.
the longer the maturity of a bond, the more affected it is by changes in interest rates
explain how the size of a coupon of a bond affects price volatility.
prices of bonds with lower coupons are affected more by changes in interest rates
define yield to redemption.
constant rate of interest that discounts the bonds future payments to its current price. the yield is the return on the bond if you buy it and hold it until maturity
what is a dividend discount model?
the discount expected future dividends at the rate of return that investors require
