Valuation of Financial Assets Flashcards
What is a measure of the interest risk of the bond?
MODIFIED DURATION is a mathematical derivative (rate of change) of price and measures the percentage rate of change of price with respect to yield. = How many dollars you lose or earn if the interest rate goes up or down. This sensitivity depends on the TIME TO MATURITY of the bond. It is written as 1/1000 points.
The yield of a bond is:
- The highest return you can make on this bond if you hold it to maturity
- The bond’s expected return
THE HIGHEST RETURN YOU CAN MAKE ON THIS BOND IF YOU HOLD IT TO MATURITY
The expected return of a risky bond is always higher than:
- The risk-free rate
- The bond’s yield
THE RISK FREE RATE
The difference between the yield and the risk free return is called:
- The risk premium
- The expected loss rate
- The spread
The SPREAD
The difference between the bond’s yield and it’s expected return is:
- The expected loss rate
- The spread
- The risk premium
THE EXPECTED LOSS RATE
If a bond’s coupon rate is higher that its yield:
- The bond’s market value is lower than its face value
- The bond’s market value is higher than its face value
The bond’s market value is HIGHER than its face value
Is an increase in a bond’s yield good or bad for the bond’s owner?
BAD: their price will go down
If a bond’s clean price is above its face value:
- The bond’s yield is very likely below its coupon rate
- The bond’s yield is very likely above its coupon rate
THE BOND’S YIELD IS VERY LIKELY BELOW ITS COUPON RATE
A company has earnings per share of 2 and a stock price of 40. What is the company’s “earnings yield”
2/40 = 5%
A company has earnings of 100 million and a market cap of 2 billion. What is the company’s price-earnings ratio?
2/0,1 = 20
A company claims that its growth rate will be 15% in the long run. The company has a ROE of 10% and pays out 50% of its earnings as dividends. Please estimate the perpetual growth rate.
g = b * ROE g = 0.1 * 0.5 = 5 %
A bond is quoted at a clean price of 104. The coupon is 8% and the last coupon has been paid out 3 months ago. How much do you have to pay for this bond?
106
A company’s earnings grow at 5%. It pays out all earnings in the form of dividends. What should be the price-earnings ratio if the discount factor is 10%?
20
