Quant - Time-Value of Money Flashcards
How do you calculate the price of a bond?
the net present value of the bond’s promised coupon payments and its par value.
How do you calculate the price of a stock?
the net present value of the stock’s expected future dividends in perpetuity.
True or False:
A stock’s required return can be estimated given the stock’s current price and assumptions about its expected future dividends and growth rates.
True
True or False:
A stock’s implied dividend growth rate can be estimated given the stock’s current price and assumptions about its expected future dividends and required return.
True
How do you compare two cash flow streams?
If valuing two (or more) cash flow streams, the cash flow additivity principle allows for the cash flow streams to be compared (as long as the cash flows occur at the same point in time).
What is the application of the “Cash Flow Additivity Principle”?
Application of cash flow additivity allows for confirmation that asset prices are the same for economically equivalent assets (even if the assets have differing cash flow streams).
What is a perpetual bond?
A perpetual bond is a less common type of coupon bond with no stated maturity date. Most perpetual bonds are issued by companies to obtain equity-like financing and often include redemption features. As N→∞ in Equation 6, we can simplify this to solve for the present value of a perpetuity (or perpetual fixed periodic cash flow without early redemption), where r > 0, as follows:
PV(Perpetual Bond) = PMT / r.
What is an “Annuity”?
What are some examples of an “Annuity”?
An annuity is a series of payments made at equal intervals.
Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments.
What is a stock’s “Terminal Value”?
The expected value of a share at the end of the investment horizon—in effect, the expected selling price.
What is a “Price-to-Earnings” Ratio?
Price-to-earnings ratio is a relative valuation metric that improves comparability by controlling for a known driver of value (earnings per share) as well as currency. It is analogous to expressing the price of real estate using a price per square meter.
What is the “Dividend Payout Ratio”?
The ratio of cash dividends paid to earnings for a period.
What is the “Forward Price-to-Earnings Ratio”?
A P/E calculated on the basis of a forecast of EPS; a stock’s current price divided by next year’s expected earnings.
What is the “Hedge Ratio”?
The proportion of an underlying that will offset the risk associated with a derivative position
