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25 Cards in this Set
- Front
- Back
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What is the fundamental principle of finance?
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The value of any asset is equal to the present discounted value of the cash flows that the asset is expected to generate
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T/f A dollar that you have today is worth less money than the promise that you will receive a dollar in the future
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F
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"you invest $100 today, when the APR is 10%, how much will you have in your account at the end of 1 year"
Solve for: I I PMT PV PY |
FV
N: 1 I= 10 PMT= 0 P= 100 P/y- 1 |
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"You invest $100 each year for the next 5 years when the APR is 10%. How much will you have in your account at the end of 5 years?"
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N= 5
i= 10 PV= 0 PMT= 100 FV= 0 P/y= 1 |
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What are the three ways corporations/ governments raise capital (cash)?
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Issue stock
Issue bonds Borrow money |
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What do companies receive when issuing stock?
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cash
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a bond is a
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long term (more than 1 year) security (investment) that shows evidence of debt
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Coupon
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the regular, fixed amount of interest- paid by the issuer of the bond semi annually
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face value
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par value, principle, amount borrowed, repaid at maturity
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coupon rate
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interest rate
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coupon rate x fv
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annual coupon rate
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Maturity
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years- date for redemption
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T/f The Market Rate of interest is constant
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f
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price of a bond=
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pv of coupon paymenbts+ pv of principle at maturity
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If a bond sells at part, then the coupon rate=
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yield to maturity
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Buy a $1000 face value bond that has a 5% coupon rate paid semi-annually, and a market determines YTM of 8%, with 10 years to maturity. You sell the bond 1 year later when the yield dropped by 1.5%. What was your HPR?
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N= 20 (10 years times 2 times per year)
I= 8 PV= Price of bond always present value (calculates to 796.15) PMT= (Face Value *coupon rate= annual payment/ 2) = (1000* .05/2 =25) 25 FV= Always 1000 P/Y= 2 C/Y= 2 |
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define annuity
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A fixed sum of money paid to someone each year, typically for the rest of their life
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Rule of 72
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A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
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An IBM bond carries a coupon rate of 6%, paid semiannually, has 4-years to maturity, and sells at par ($1,000). What will the bond’s price be one year later when the yield to maturity has fallen by 1%? Quote
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N=6
I=5 PMT= 30 FV= 1000 P/Y =2 |
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As Maturity increases, what happens to pv of pricnipal at maturity and pv of coupon payments
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pv of coupon payments increase
pv of princiapl at maturity |
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How do you maximize profit from trading a bond?
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Buy a long term bond when the yield is high and sell when its' yield is low
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If you deposit $100 today with annual compounding, how much will your investment be worth at the end of five years? Quote
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N=5
I=5 PV=-100 PMT=0 FV=x P/y=1 C/y=1 |
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You borrow $500,000 from a bank on a 30-year loan with a 5.5% annual interest rate. How much will the monthly payment b?, quote
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N=360
PV=500,000 PMT=solve FV=0 P/Y=12 |
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You borrow $200,000 to finance a corporate expansion. The interest rate is 6% and the loan has a 5-year term. How much will the annual payment be? If you make all the payments how much will you pay in interest on the loan? Quote
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N=5
i=6 PV=200,000 PMT=solve Fv=0 P/Y=1 |
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Beverly Bank is offering Endicott College business majors a ‘special’ savings plan whereby they deposit $1,000 today and in two years receive $1,200. All other clients receive 8% per year on deposits. Is this ‘special’ offer a good deal?
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quote
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