Week 3 - Intro to bonds & common stock Flashcards
Par value / face value / principal
Nominal value of the bond that is repaid to bondholder at maturity date (= specified date on which par value of bond must be repaid)
Coupon
Periodic interest payment on a bond
= par value * coupon rate(= expressed as a % of a bond’s par value)
- assume paid annually
Zero-coupon bond
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
Coupon bond
Pays regular coupon interest payments up to maturity, when the par value is also paid
Yield to maturity (YTM)
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
Bonds trading at a premium vs discount
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
Initial public offering (IPO)
The 1st sale of stock in a corporation to the public
Dividend yield
*Dividends = Payments made by companies to shareholders
Ratio of annual dividend to share price
P/E ratio
Share price divided by earnings per share (EPS)
Market value
The total stock market value of the firm’s stock, ie. price per share * no. of shares outstanding
Book value
Accounting value of the firm’s equity as reflected on the co.’s balance sheet
Liquidation value
The amount that would be available to shareholders if the firm was liquidated and all creditors paid off
Payout ratio
Ratio of dividends to earnings
= 1 - plowback ratio
Plowback ratio / retention ratio
Proportion of earnings retained by the firm for investment purposes
= 1 - payout ratio
Return on equity (ROE)
EPS for time t / Book value of equity per share for time (t-1)
