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14 Cards in this Set
- Front
- Back
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Valuation problems all... |
Establish the value today of a future cash flow. |
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As cash flow estimates increase, what happens to market prices? |
Market prices increase as cash flow estimates increase. |
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What happens to market prices as investor required returns increases? |
Market prices decline. |
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What are callable bonds? |
Bonds where an option is granted to the issuer to buy back the bond before maturity date. |
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What are convertible bonds? |
Bonds where an option is granted for the investor to exchange the bond for another type of security (say, stock). |
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What is a zero coupon bond? |
Bonds that pay only the face value at maturity with no coupons (interest). |
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What is the basic idea behind calculating the price of a bond? |
Bond price is essentially bringing the cashflows to present value. |
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PV Formula for Bonds |
= CF/ (1+y) + CF/ (1+y)^2 ... |
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What happens to the value of a bond if the discount rate/yield decreases? |
The value of the bond increases. |
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How do we find the price of a bond? |
Value of a bond with combined PV and annuity formulas PofB= (FV*Coupon/y)*(1-(1/1+y^n))+FV/(1+y)^n |
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What is current yield? |
The annual coupon of the bond/price (Treats bond as a perpetuity) |
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What is yield to maturity? |
The single discount rate (IRR) used to calculate the price of a bond. |
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How to calculate the holding period return? |
=P1-P0+ coupon/P1 |
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How to calculate the IRR? |
Purchase Price=coupon(1/r)[1-(1/1+r^n)]+sale price/(1+r)^t |
