FIN 3100 Chp 3 book notes

Throughout the life of the bond, The ________ remains constant but the ______ may change due to the arrival of new information.

1. Coupon rate 2. required rate of return

The inverse relationship between interest rates and the present value of a security holds for __________ and __________

1. Current market prices; expected rates of return 2.Fair present value; required rates of return.

Duration relates the percentage change in bond _________ to ________ changes in interest rates.

1. Price 2. small

As the rate of return on a bond _______, the duration ___________

1. increases, decreases 2. decreases, increases

When the required rate of return is greater than the coupon rate, the bond will sell at ?

A DISCOUNT

The exact bond price/ interest rate relationship is ________, while duration is __________

Convext, Linear

When new bonds are issued, their coupon rate is generally set to the ?

Current required rate of return.

Economically speaking, the duration is the ______ of a security's value to small interest rate changes.

Elasticity

The dividend pattern for a stock with supernormal dividend growth is?

Experiencing a period of non-constant growth followed by a constant growth forever.

The _______ of the stock is calculated by discounting the expected dividends and future sale price of the stock at the required rate of return.

Fair present Value

The relationship between bind price sensitivity and maturity is ?

If interest rate changes are measured using required rates of return, fair present value is the price sensitivity being measured. If interest rate changes are measured using expected rates of return, current market price is the price sensitivity being measured **-The larger the percentage change in the bond's value for a given interest rate change, the larger the bond's price sensitivity -NOT LINEAR

The coupon rate determines the ________ that will be made by the bond issuer to the bond holder.

Interest payments.

The ________ is the return that compensates the investor for the risk undertaken by holding a share of stocks.

Required rate of return

Coupon Rate

The coupon rate on a bond instrument is the annual (or periodic) cash flow that the bond issuer contractually promises to pay the bond holder.

The realized rate of return

The interest rate ACTUALLY earned on an investment in a financial security. -Thus is a historical interest rate of return. -The realized rate of retune cannot be determined until all of the security's cash flows have been received.

Expected Rate of Return

The interest rate a market participant EXPECTS to earn by buying the security as its current market price. receiving all projected cash flow payments on the security, and selling the security at the end of the participant's investment horizon.

Required rate of return

The interest rate used to determine the fair present value of a financial security. -Is thus the interest rate the investor should receive on the security given its risks.

Which of the following is true regarding the transition from the non-constant dividend growth period to the constant dividend growth period ?

The last non-constant growth dividend marks the beginning of the constant growth period.

Yield to maturity (YTM)

The return the bond holder will earn on the bond if he or she buys the bond at its current market price, receives all coupon and principal payments as promised. (Holds the bond until maturity)

For a large intrest rate decrease, duration _______ the increases in bond price

Under predicts

To determine the contribution of the non-constant dividends to the current stock price assuming the rate of return is Rs, you must?

Use Rs to discount each dividend to the present and add them together.

Coupon bonds

When the bond pays a stated coupon rate of interest to the holders of the bonds. -The interest or coupon, payments per year, INT, are generally constant (fixed) over the life of the bond.,

zero coupon bond

a bond that makes no coupon payments and is thus initially priced at a deep discount