# Finance Chapter 10

 Present Value The value of any asset is based on the _____ _____ of the cash flows the asset is expected to produce in the future Coupon Payments, Par Value Bond Value is determined by the PV of _____ _____ (an annuity) and _____ _____ (a lump sum) Inversely Current bond values are _____ related to interest rates INT _ _ _ = dollars of interest paid each year (Coupon rate * Par value) Coupon Rate Stated annual interest rate, is initially set to make the bond sell at par Yield to Maturity (YTM) the rate implied by the current bond price Yield to Maturity (YTM) the average rate of return earned on a bond if it is held to maturity Yield to Call (YTC) the average rate of return earned on a bond if it is held until the first call date Equal When rD (market value) equals the coupon rate of interest, the bond will sell at a value _____ to the par value Yield to Maturity (YTM) The rate of return earned by investing in a bond Same As interest rates change, so do the market values of bonds such that the rate of return earned by investing in a bond, its YTM, is the same as the appropriate interest rate in the financial markets Decrease When market rates rise, bond prices _____ equals, par When the market rate, rD, is equal to a bond’s coupon rate, the bond’s market price _____ its maturity (par) value and sells at ____ Less, Discount When rD is greater than a bond’s coupon rate, the bond’s market price is _____ than its maturity value, and the bond sells at a _____ Greater, Premium When rD is less than a bond’s coupon rate, the bond’s market price is _____ than its maturity value, and the bond sells at a _____ Less Than When YTM is ______ ______ coupon, the bond trades at a premium Greater Than When the YTM is _____ _____ coupon, the bond trades at a discount Equals When the YTM _____ coupon, the bond trades at par Always The market value of a bond will _____ approach its par value as its maturity date approaches, provided the firm does not go bankrupt Principal The bond is only worth the _____ amount at the maturity date More Long-term bonds have _____ price risk than a short-term bond Price risk Change in price due to changes in interest rates More Low coupon rate bonds have _____ price risk that high coupon rate bonds Reinvestment Rate Risk Uncertainty concerning rates at which cash flows can be reinvested More Short-term bonds have _____ reinvestment rate risk than long-term bonds More High coupon rate bonds have _____ reinvestment rate risk than low rate bonds More The long-maturity bond will have much _____ volatility with respect to changes in the discount rate More The low-coupon bond will have much _____ volatility with respect to changes in the discount rate Issued Coupon rate (an investor’s required return) depends on the risk of the bond when it is _____ Zero Coupon Bonds _____ _____ _____ YTM comes from the difference between the purchase price and the par value Zero Coupon Bonds Sometimes called deep discount bonds or original issue discount bonds (OIDs) Po The actual market price of the stock today P(hat)(sub t) The expected price at the end of Year t P(hat)(sub not) The intrinsic value as seen by the investor D(hat)(sub t) The dividend the investor expects to receive at the end of year t Do most recent dividend already paid r(:)(sub s) The rate of return on a common stock that an individual investor actually receives, after the fact; equal to the dividend yield plus capital gains yield Dividends If you hold a stock forever, all you receive is the _____ payments Dividend The value of a stock today is the present value of the _____ payments expected in the future Zero If future cash flows are constant, the value of a _____ growth stock is the present value of a perpetuity More The higher the P/E ratio, the _____ investors are willing to pay for each dollar earned by the firm Payback Period P/E ratio gives an indication of a stock’s _____ _____ P/E Ratio Can be used to value the firm based on estimated earnings and an “intrinsic” or industry mulitiple, Used to estimate the value of stock Opposite Stock prices move _____ to changes in rates of return Same Prices move in the _____ direction as changes in cash flows expected from the stock in the future
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