Week 3 - Intro to bonds & common stock Flashcards

1
Q

Par value / face value / principal

A

Nominal value of the bond that is repaid to bondholder at maturity date (= specified date on which par value of bond must be repaid)

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2
Q

Coupon

A

Periodic interest payment on a bond
= par value * coupon rate(= expressed as a % of a bond’s par value)
- assume paid annually

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3
Q

Zero-coupon bond

A

Pays no annual interest (coupons)
- aka pure discount bond
- buy if paying for an amount less than par value, ie. getting positive return/capital appreciation

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4
Q

Coupon bond

A

Pays regular coupon interest payments up to maturity, when the par value is also paid

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5
Q

Yield to maturity (YTM)

A

Constant, hypothetical discount rate that when used to compute the PV of a bond’s cash flows, gives you the bond’s market price as the answer

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6
Q

Bonds trading at a premium vs discount

A

If coupon rate > YTM, then the bond price will be above par (trading at premium)
If coupon rate < YTM, then bond price will be below par (discount)

eg. in a world of +ve interest rates, zero coupon bonds must always be priced below par

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7
Q

Initial public offering (IPO)

A

The 1st sale of stock in a corporation to the public

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8
Q

Dividend yield

*Dividends = Payments made by companies to shareholders

A

Ratio of annual dividend to share price

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9
Q

P/E ratio

A

Share price divided by earnings per share (EPS)

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10
Q

Market value

A

The total stock market value of the firm’s stock, ie. price per share * no. of shares outstanding

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11
Q

Book value

A

Accounting value of the firm’s equity as reflected on the co.’s balance sheet

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12
Q

Liquidation value

A

The amount that would be available to shareholders if the firm was liquidated and all creditors paid off

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13
Q

Payout ratio

A

Ratio of dividends to earnings
= 1 - plowback ratio

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14
Q

Plowback ratio / retention ratio

A

Proportion of earnings retained by the firm for investment purposes
= 1 - payout ratio

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15
Q

Return on equity (ROE)

A

EPS for time t / Book value of equity per share for time (t-1)

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16
Q

Earnings growth rate, g

A

g = ROE * plowback ratio

17
Q

Gordon growth formula for stock pricing

A

P0 = D1 / ((E(r) - g)

Growing perpetuity

18
Q

Formula for dividend

A

D = EPS x payout ratio

19
Q

Stock price formula w/o growth; all EPS paid out as dividends

A

P0 = EPS1/E(r) + PVGO

PVGO = present value of growth opportunities