# week 8 - finance

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- Created by: jmf00632
- Created on: 27-12-19 21:30

coupons

the statement interest made on a bond

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face value

the principle amount of a bond that is repaid at the end of the term. also called par value

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coupon rate

the annual coupon divided by the face value of a bond

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maturity

the specified date on which the principle amount of a bond is paid

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yeild to maturity (YTM)

The rate required in the market on a bond

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current yeild

a bonds annual coupon divided by its price

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what is a bond

A bond is a type of loan. When a company wishes to borrow money from the public (not from banks) on a long-term basis, it does so by selling (issuing) debt securities called bonds.

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A typical bond has a fairly simple structure (1)

– The investor lends a company an amount of money

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(2)

– The company (issuer) pays interest every period –called a ‘coupon’

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(3)

– The company (issuer) repays the investor an agreed amount – called the ‘face value’ - at the end of the loan period, that is, on ‘maturity’

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(4)

– Usually bonds have an active secondary market

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face value

Face value of $1,000 (also referred to as ‘par value’ or ‘nominal value’) This is the amount paid to the investor on the maturity date.

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coupon rate

The investor will receive 7 5/8% x $1,000 every year

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what is the bond / value price

Bond value/price is simply the Present Value of the future cash flows, using the bond investor’s required rate of return as the discount rate.

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bond value =

pv of coupons + pv of face value

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what is the discount rate, r?

r is the required rate of return of the company’s bond investors and is based on the rate of return that potential bond investors could obtain if they invested their money in bonds of similar risk

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valuing a simple annual bond -f

face value repaid at maturity

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c

coupons paid each period

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t

number of periods to maturity

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r

the investors rate of return (yield to maturity)

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how do you find the value of a simple bond? first step

first draw up a table howing the cash flows - coupon= bond x fv and fv = original fv + coupon

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second step

use the pv annuity formula to get the pv of the coupons

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third step

then use the pv (single cash flow) formula to obtain the pv of the repayment of the fv of the matuirty

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fourth and final step

add your pv and fv answers together

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valuing a semi annual bod part way through its life - first step

semi annual bond % x value / years left of maturity = coupon

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second step...

do a data table - m, f (amunt paid on matuirty) c (coupon), r (qr/m) t years x m

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third step..

then put the coupon amount in a timelibe with the timinig values being what you got from the "t" calculation - e.g. if the answe was 4 and the bond has 2 years left, you split 2 years into 4 sep amounts

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fourth step....

use bond value equatio given to you on the forula sheet

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If asked about stock value -

use formula number 36

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Equities: Valuing Shares - different growth periods 2 stage approach:

Where dividends have different growth rates in different time periods

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examples

• Non-constant growth in the first few years and then constant growth later on in perpetuity • Two growth rates, Growth rate 1 for the first few years and then a different growth rate 2 for remaining years in perpetuity.

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valuation approach:

split the problem into sections according to the growth rate in different time periods

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step 1 -

pinpoint all the D's and the r and g that should be in the question

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step 2 - make a timeline

put the cash flow dividend amounts in and lable the amounts with non constant growth and the amouns with constant growth - the amounts with constant grwoth need to be done like this e,g, 2.50 x 1+0.05 to he power of... if need be

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step 3 - then use the formula growing perpeturity -

in c the constant growth amount x r goes in c - then follow rest of equation like normal

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step 4 - work out pv of each cash flow seperatley - this formual isnt on the formula sheet but use the po formula ad instead of r-g do r+g

e.g. dividend value / 1 +r to the powr of .... then add them alll togther

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if a question dosent specify the fv use..

£100

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if a question asks for the bonds value - to work out c -

qr / m x fv

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## Other cards in this set

### Card 2

#### Front

face value

#### Back

the principle amount of a bond that is repaid at the end of the term. also called par value

### Card 3

#### Front

coupon rate

#### Back

### Card 4

#### Front

maturity

#### Back

### Card 5

#### Front

yeild to maturity (YTM)

#### Back

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