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17 Cards in this Set
- Front
- Back
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FV and FV annuity -- you need
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-larger interest
-more time -more frequent compounding |
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PV and PV annuity
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-smaller interest
-less time -less compounding (discounting) |
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What are fixed income securities?
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- Fixed income securities are a type of long term debt. They can include term loans from a bank, bonds, and preferred stocks.
- Companies issue to raise capital. - safer bet than stocks because the borrower must pay interest and principal on specific dates - Less risky, but less reward. |
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Security for bonds
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backed by collatoral - a physical asset promised if company defaults
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Risk is
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the potential variability of returns from a project or portfolio
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Returns are
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cash flows
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Risk free returns are
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US treasury bonds and SAFE
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Required return =
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risk free return + risk premium
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Risk premium is
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assigned by an investor to a given security in determining the required rate of return
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Risk premium consists of...
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maturity risk - longer the time, the higher the Rr
default risk - high risk means higher chance of default seniority risk - where you get paid, lower on list means higher Rr marketability risk - hard to sell company is higher risk financial risk - financially unsound cos are more risky |
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Discounted bond
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Rr > coupon
-less than par |
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Premium bond
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Rr < coupon
-greater than par |
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Par
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Rr = coupon
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par value
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stated value of the bond
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maturity date
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date that the bond must be paid in full
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coupon rate
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rate paid to the bond holder
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Required rate of return
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used to value a stream of expected cash flows
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