Finance chapter 5,6,7
A 10-year maturity bond with a face b=value of $1,000 makes annual coupon payments and has a coupon rate of 8.0%. What is the bond's YTM if the bond is selling $900?
9.60%
Term structure of interest rates:
a listing of bond maturity dates and the interest rates that correspond with each date
Perpetuity
a stream of level cash payments-starting next period never ends
Yield to maturity (YTM):
discount rate (interest rate) for which the present value of the bond's payments equals the price. (It is also the interest rate you would earn on the bond if you bought it today and held it until it matures)
Current yield:
annual coupon payment divided by the bond prive
What is the value of a bond that has a par value of $1,000, a coupon rate of 6.0% (semi-annually), and matures in 10 years? Assume an interest rate of 5.50%
$1,038.07
What is the price of a 30-year 10% annual coupon bond with a $1,000 face value that offers a yield to maturity of 8.5%?
$1,161.20
You deposit $125 into an account which pays 6.5% per year for the first two years. However, the rate of interest drops to 3.5% thereafter. What is the value of your investment five years from today (Assume annual compounding)?
$157.19
What is the price of a 30-year 10% annual coupon bond with a $1,000 face value that offers a yield to maturity of 10%?
$1,000
What is the value of a stock with an expected dividend and price next year of $0.16 and $60 respectively? Use a 12% discount rate.
$53.71
If the present value of an ordinary, 5-year annuity is $6,000 and interest rates are 10%, whats the present value of the same annuity due?
$6,600
You are scheduled to receive an $800 cash flow in one year, $800 cash flow in two years, and pay a $1,000 payment in three years. If interest rates are 7% per year, what is the combined present value of these cash flows?
$630.12
Efficient Market: Weak form efficiency: Semi-strong form efficiency: Strong form efficiency:
-market in which prices reflect all available information -market prices reflect all historical prices -market prices reflect all publicly available information -market prices reflect all information, both public and private
Compounding
Taking present money and sending them into the future
How many years will it take $1 million to grow to $4million with an annual interest rate of 7%?
t=20.47
You have $1,000 in an account which pays 6% ANNUAL compound interest. How many ADDITIONAL dollars of interest do you earn over a four-year period if you moved the money to an account earning 8%?
$98.01
Blue skies just paid a $3.00 dividend. Blue skies investors require a 12.0% return on investments of comparable risk, and they anticipate dividends to increase at 4.0% forever. What is an appropriate price for Blue skies stock?
$39.00
You just bought a new computer for $5,000. The payment terms are 3 years same as cash. If you can earn 6% on your money, how much should you set aside today in order to make the payment due in three years?
$4,198.10
You need to borrow $20,000 to purchase a new truck. The current loan rate is 7.7% compounded MONTHLY. You decide that you want to pay the loan off in equal monthly payments over 4 years. What is the size of your monthly payment?
$485.45
Bearkat stores inc, stock is currently selling for $23.00. The firm is expected to pay a dividend of $2.75 one year from now. Dividends are expected to grow at a constant rate of 4% indefinitely. Compute the required rate of return for BKS stock.
15.96%
What is the present value of a 30 year annuity of $1,100 each year if your required return is 12%?
$8,860.78
What is the price of a 30-year 10% annual coupon bond with a $1,000 face value that offers a yield to maturity of 12.5%?
$805.84
What is the total PRESENT value of $50 received in one year, $250 received in two years, and $900 received in six years if the discount rate is 8%?
$827.78
What is the present value of $1,100 perpetual cash flow if your required return is 12%?
$9,166.67
What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in eight years?
r=4.3%
Your auto dealer gives you the choice to pay $19,999 cash now, or make three payments: $10,000 now, $7,000 at the end of year one, and $4,000 at the end of year two. If your cost of money is 8%, what is the PV of the installment plan?
$19,910.84
Ten years ago, Jane invested $1,000 and locked in an 8% annual interest rate for 30 years (ending 20 years from now). James can make a twenty year investment today and lock in a 7% interest rate. How much money should be invested now in order to have the same amount of money in 20 years as Jane?
$2,600.37
Financial Analysts forecast Bearkat stores inc, growth for the future to be 8%. Their recent annual dividend was $0.83. What is the value of their stick when the investors require a rate of return of 12%?
$22.41
Future Value: Compound Interest: Simple Interest:
- amount to which an investment will grow after earning interest. - interest earned on interest - interest earned only on the original investment
Primary market: Initial public offering: Seasonal issue: Common stock: Secondary market: Dividend: P/E ration:
- market for the sale of new securities by corporations - first offering of stock to the general public -sale of new shares by a firm that has already been through an IPO -ownership shares in a publicly held corporation -market in which previously issued securities are traded among investors -periodic cash distribution from the firm to the shareholders -ratio of stock price to earnings per share
Inflation: Nominal interest rate: Real interest rate:
- rate at which prices as a whole are increasing - rate at which money invested grows - rate at which the purchasing power of an investment increases
Bid price: Ask price:
- the price at which investors are willing to buy shares -the price at which current shareholders are willing to sell their shares
Dividend discount model: Constant growth DDM: Payout ration: Plowback ration: Sustainable growth rate: PVGO:
-discounted CF model which states that today's stock price equals the present value of all expected future dividends -a version of the DDM in which dividends grow at a constant rate -fraction of earnings paid out as dividends -fraction of earnings retained by the firm -the firms growth rate if it plows back a constant fraction of earnings, maintains a constant ROE, and keeps its debt ration constant -net present value of a firm's future investments
Book value: Liquidation value: Expected return:
-net worth of the firm according to the balance sheet -net proceeds that could be realized by selling the firm's assets and paying off its creditors -the percentage yield that an investor forecasts from a specific investment over a set period of time.
Bond: Face value (par value or principal value): Coupon: Coupon rate:
-security that obligates the issuer to make specified payments to the bondholder -payment at the maturity of the bond - the interest payments made to the bondholder -annual interest payment, as a percentage of face value
Default of credit risk: Default premium: Investment grade: Junk bonds:
-the risk that a bond issuer may default on its bonds - the additional yield on a bond that investors require for credit risk -bonds rated Baa or above (moody's) or BBB or above by S&P -bond with a rating below BAA or BBB
Present value: Discount factor: Discount rate:
-value today of a future cash flow -present value of a $1 future payment -interest rate used to compute present values of cash flows
What is the YTM of a 10.0% semi-annual coupon bond with $1,000 par value, which matures in 3 years? Assume the current market price of the bond is $1,081.95
6.93%
A 9.0% coupon bond with 10 years left to maturity is offered for sale at $1,017.20. What yield to maturity (YTM) is the bond offering? Assume interest payments are paid semi-annually?
8.74%
Annuity
Equally spaced level stream of cash flows-starting next period- for a limited time period
How much would be in your savings account in 5 years after depositing $1,200 today if the bank pays 4% interest per year?
FV=$1,459.98
With an interest rate of 7%, what is the present value of $500 received four years from today?
PV=$381.45
What is the present value of the following set of cash flows at an interest rate of 9%: $1,000 today, $2,000 at the end of year one, $4,000 at the end of year three, and $6,000 at the end of year five?
PV=$9,823.18
Rate of return:
earnings per period per dollar invested
