Lecture sevenn Flashcards
1
Q
what is known as a “over-the-counter” trade?
A
Direct trading between buyer and seller (without an exchange)
2
Q
how do most stock trades happen
A
via an exchange
3
Q
what does EMH stand for?
A
Efficient Market Hypothesis
4
Q
what does Efficient Market Hypothesis explain
A
how securities are priced based on availabe informarion
5
Q
what are the three types of efficeny in efficent market hypothesis
A
weak form, semi strong, and strong form efficency
6
Q
what does Weak Form Efficiency mean
A
Prices reflect past price movements only.
7
Q
what does Semi-strong Form Efficiency mean
A
Prices reflect all publicly available information.
8
Q
what does strong Form Efficiency mean
A
Prices reflect all public and private information.
9
Q
where are inefficent markets possible during the EMH
A
where prices do not reflect a company’s future prospects.
10
Q
componets of stock returns
A
capital growth, dividends, rate of returns
11
Q
capital growth for stock returns
A
increase in the stock price.
12
Q
dividends for stock returens
A
company earnings distributed back to
shareholders.
13
Q
rate of return formula
A
income + capita gain / inital price
14
Q
rate of return also known as
A
“total investor return” or “total shareholder
return”.
15
Q
are returns guarnteed when invest into stocks
A
no
16
Q
when u refer to income on the rate of return what doesit mean
A
the dividend
17
Q
capital gain referred to on the rate of return equation
A
p1-p0,
(the new price - current price)
18
Q
stocks: Dividend per share (DPS) =
A
DPS=
Total ordinary dividend/ number of ordinary shares
19
Q
what does the DPS formula tell us
A
this ratio tells you how much dividend is paid for each share owned.
20
Q
stocks: Dividend Yield (%): formula
A
DPS/ stock price at the START of the period
21
Q
stock: dividend yield(%) tells us
A
t shows the return on investment from dividends alone.
22
Q
stock: earnings per share (EPS) formula
A
EPS: Annual earnings/ number of shares
23
Q
stock: earnings per share (EPS) tells us
A
indicates the portion of a company’s profit allocated to each share.
24
Q
stock: price-earnings (P/E) ratio formula
A
P/E Ratio = Stock price per share/ EPS
25
stock: price-earnings (P/E) ratio meaning
A higher P/E ratio often indicates high expectations for future growth.
26
expected rate of return formula (RoR)
dividend yield/ capital appfreication
27
book value meaning
a firm represents the value according to its balance sheet.
28
book value formula
assets - libabilities = shareholders equity
29
book value per share
shareolders equity/ number of shares outstanding
30
liquidation value def
The liquidation value is the net amount that could be obtained by selling off a company's assets and paying off its liabilities.
31
liquation value siginicance
Often considered the minimum value when a company is being acquired.
32
when is liquation value useful
Useful in situations where a company might face bankruptcy or is being dissolved.
33
what does liquation value actually do
gives a conservative estimate compared to other valuation methods, as it focuses on realizable asset value minus liabilities.
34
market value
is the total value of a company's shares on the stock market.
35
market value also knwon as
a market capitalisation, market cap
36
market value formula
carrent market price per share x number of ourstanding shares
37
market vs book value, which is better
market
38
main reasons why market value is better
1- earnings power
2- intangible asseta
3- future invesrments
39
why is market Earnings Power of Assets mean
The ability to generate more returns than just the asset cost.
40
intangible assets in terms of market value
These include things like brand reputation, intellectual property, and employee expertise that are not recorded on the balance sheet.
41
future investments in terms of market value
Projects with a positive Net Present Value (NPV) increase the company's value.
42
What is market vs book value based on
book is based on histroical costs, -static
market is based on current market scenarios- dymamic
43
when is comparing using valuation useful
: Useful for companies within the same industry.
44
definitions of intrinsic value
The present value of expected cash flows from owning a stock.
45
formula of intrinsic value
The present value of expected cash flows from owning a stock.
46
intrinsic value formula
v0= Dividend1 + price1 / (1+r)
v0 = current stock price
Dividend1 = dividend expected in one year
P1 = expected price afrer 1 year
r= required rate ofreturn
47
dividend discount model formula (infinite time horizon
p0 = dividend1 / r-g
p0= current stock price
diidend1 = dividend expected in one year
r= required rate of return
g= dividend growth rate
48
what does the ITH formula mean
The calculated value reflects the stock price considering perpetual growth.
49
gordans growth model assumtption
Constant growth in dividends.
50
when do u use the godans growth model
Stocks with a consistent dividend growth rate are often valued using this model.
51
how do mature companies grow
through reinvesting earnings.
52
what do some companies aim to pay
a gradulla rising dividend
53
sustainable growth rate estimated using:
g= plowback ratio x retuurn on equity
54
plowback ration means
% of earnings reinvested
55
return on eqiuity % meaning
annual earnings/ shareholders equity
56
compound anual growth rate formuls is an alternative
r = (FV/PV) ^1/t - 1
FV= future value = PV * (1+r)^t
PV = present value (inital)
1/t = 1/ years
57
what does the CAPGR in the growth rate indicate
growth rate helps estimate the future dividend increase.
58
what is a bond
financial instrument where the issuer promises to pay the bondholder specified payments at certain intervals and repay the principal on maturity.
59
what are the three types of markets
primary, secondary, OTC
60
Primary market for bonds
bonds issues first time
61
secondary markets for bonds
bonds traded between investors
62
OTC markets for bonds
"over the counter" - bond trading takes plaes in OTC rather then on centralised exchanges
63
issue price
initial sale price of the bond to investors.
64
market price
The current trading price of the bond in the secondary market.
65
face/par value
The amount paid to the bondholder at maturity, usually fixed (e.g., $1,000).
66
redemption value
Amount paid back at maturity, often equal to the face value.
67
coupon rate
The interest rate paid annually on the bond’s face value (expressed as a percentage).
68
coupon paymnent
: The interest payment made to the bondholder.
69
coupon payment equation
copuon paymnet = coupon rate x face value
70
value of a bond
present value of the cash flows (coupon payments plus face value on maturity)
71
example valuing a bond:
Face Value: $1,000
Coupon Rate: 7%
Coupon Payment: $70
Required Yield: 10%
Discount Factors:
Year 1: 0.9091
Year 2: 0.8264
Year 3: 0.7513
Bond value:
(70 x 0.9091) + (70 x 0.8264) + (70 x 0.7513) + (1000 x 0.7513)
=925.39
72
bond value equation
(coupon payment x DF y1) + (coupon payment+ DF y2) etc + (face value x DF for final year)
73
bond value fluctuations when the yield (market rate) is higher then coupon rate
, the bond price decreases (trades at a discount). visa versa
74
yield senstivity on bonds
Longer maturities and lower coupon rates make bonds more sensitive to changes in interest rates.
75
bond prices
are quotes as a % of the face value
76
example of bond price if face value is 1,000 and its quoted at 92.539%
bond price = 1000 x 92.530/100 = 925.39
77
when are coupon payments paid
will be annual, paid on the last day of the year.
78
interest rate meaning in terms of bonds
: if interest rates are altered, this has an inverse
impact on bond prices for fixed interest bonds.
79
increase interest rates on bonds (discount)
coupons on bonds already issued
become less attractive > bond price decreases.
80
decrease on interest rates on bonds (premium)
coupons on bonds already issued
become more attractive > bond price increases.
81
interest rate risk
which is the risk of bond prices fluctuating due to changes in interest rates.
-time to matuirty and default risk
82
measures of investor return on
bonds
current yield, rate of return, yield to matuirty
83
current yield formula
annual coupon payment/ bond price
84
what does coupon consider
measure of return only considers the coupon (and
therefore ignores any capital loss or gain).
85
yield to matuirty meaning
The internal rate of return (IRR) on a bond if held until maturity.
86
what measure of investor return of return is best
yield to matuirty
87
why is yield to matuirty rhe best
Takes into account all future cash flows, including coupons and the redemption value.
88
normal yield curve has what curve
Upward Slope: Indicates higher yields for longer maturities.
89
what does an upward slope happen
Longer-term bonds are riskier due to interest rate risk and default risk.
90
default risk
risk that a bond issuer fails to make interest or principal payments
91
government vs copoerate bonds
govement have lower risk, coperoatr have higher risk (esp when companioes has weak financial stability)
92
plain bonds
most common bonds with fixed coupon rates and fixed maturity dates
-regular payments (coupons) made throughout life
93
zero coupon bonds
No periodic interest payments (coupons).
Issued at a discount to their face value and redeemed at par on maturity.
Profit comes from the difference between purchase price and face value.
94
floating rate bonds
Coupon rate changes with market interest rates (e.g., linked to LIBOR).
Offer protection against rising interest rates
95
convertible bonds
Give bondholders the option to convert bonds into a fixed number of shares of the issuing company.
Attractive during periods of rising stock prices.
96
beating the market means
Achieving returns greater than the market benchmark, such as S&P 500 or FTSE 100.
97
objective of beating the market
Find undervalued or overvalued securities to capitalize on price movements.
98
technical analysists
Technical analysts attempt to identify and exploit patterns in security prices and trading volumes.
Example:
Buying shares when past patterns suggest that prices will soon rise
99
why arent technical anlsysis not useful
Random Walk Theory:
Argues that past price movements are not reliable indicators of future performance.
Price movements are often random and unpredictable.
100
what is random walk theroy
The random walk hypothesis suggests that stock prices change randomly and unpredictably
101
fundamental anyslis
focus on intrinsic value by analyzing:
-Company financials (e.g., balance sheets, income statements).
-Management quality and industry conditions.
-Macroeconomic factors (e.g., inflation, interest rates).
102
challenge of fundamental anslysis
Efficient Market Hypothesis (EMH):
Once new information becomes public, the market quickly adjusts the share price.
Makes it hard to consistently beat the market using fundamental analysis.
103
clever money is it useful
Even professional investors and active funds often fail to consistently outperform the market.
Why?
Market conditions, human errors, and unpredictable factors make it challenging to maintain superior return
