FIN220 2nd Midterm Review.

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Presentation transcript:

FIN220 2nd Midterm Review

Chapter 7 Bonds & Their Valuation Who issues bonds? Treasury bonds Corporate bonds Foreign bonds

Chapter 7 Bonds & Their Valuation Key characteristics of bonds Par value Coupon interest rates (Fixed-rate, Floating-rate, Zero-coupon) Maturity date Other features Convertible bonds, Warrants, Putable bonds, Income bond, Indexed bond, Call provisions & Sinking funds Bond valuation Discount bond Vs. Premium bond Bond yields Current Yield , Capital Gain Yield & Yield to maturity (YTM) Yield to call (YTC)

Chapter 7 Bonds & Their Valuation Changes in bond values over time Bonds with semiannual coupons Assessing a bond’s riskiness Price (Interest rate) risk Reinvestment rate risk Default risk Various type of corporate bonds Mortgage bonds, Indenture, Debenture & Subordinated debenture Bond ratings Bond rating criteria Investment-grade bond Vs. Junk bond Bankruptcy & reorganization

Chapter 8 Risks & Rates of Return What is Risk? Stand-alone Risk Measuring Stand-Alone Risk: the Standard Deviation & the Coefficient of Variation Portfolio Risk Diversifiable Risk Market Risk Expected Rate of Return Risk Aversion & Required Returns Risk premium

Risks & Rates of Return Risk in a Portfolio Context: the CAPM Expected Portfolio Returns Correlation The Beta Coefficient (Avg. Beta or Market Beta = 1) Relationship between Risk & Rates of Return Security Market Line Equation The Impact of Expected Inflation Changes in Risk Aversion (Market Risk Premium) Changes in a Stock’s Beta Coefficient (Portfolio Beta)

Chapter 9: Stocks & Their Valuation Facts about common stock? Legal Rights & Privileges of Common Stockholders Control of the Firm Stock Price vs Intrinsic Value (Undervalue Vs. Overvalued) Why Do Investors & Companies Care About Intrinsic Value? The Discounted Dividend Model (DDM) Growth Rate, g (Supernormal, normal, zero & negative growth) Required Rate of Return VS. Expected Rate of Return Total return (rs )= Dividend Yield + Capital Gains Yield Expected Dividends and price as the Basis for Stock Value

Stocks & Their Valuation Constant Growth Stocks Dividends vs Growth Required Conditions for the Constant Growth Model Valuing Nonconstant Growth Stocks Terminal Date & Terminal Value (Horizon value) Valuing the Entire Corporation The Corporate Valuation Model Comparing the Corporate Valuation & Discounted Dividend Models Firm Multiples Method Preferred Stock