Term
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Definition
| The phenomenon that bond prices change when interest rate changes (market rate) |
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Term
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Definition
| Someone has control of money that isn't theirs. CEO many not make the best decision regarding financing since they are not personally attached to the money. |
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| Importance of financial managers |
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Definition
| caretakers of owner's money, pick projects to invest in, determine how to pay for investments, ensure that firms can meet financial obligations |
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Term
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Definition
| determining if a project is financially feasible and choosing between profitable projects. |
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Term
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Definition
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Term
| Goals of financial managers (VERY BROAD) |
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Definition
| Maximize shareholder value OR maximize firm value |
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Term
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Definition
| measures the relative payout of an investment |
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Term
| Functions of Financial markets & Intermediaries |
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Definition
1) Liquidity (stocks tradeable b/w many people).
2) offer many payment mechanisms (banks and investors, credit/debit cards).
3) reduce risk.
4) provide price information; tickers provide the terms and price of stocks.
5) Transfer cash across time.
(bank loans --> transfer future income to now) |
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Term
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Definition
| Estimates the number of years required to double money at a given interest rate. |
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Term
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Definition
| # of yrs to double = 72 / rate ( not in decimal) |
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Term
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Definition
| Series of fixed, identical payments to be made for a specified number of periods |
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Term
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Definition
| series of fixed, identical payments to be made FOREVER |
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Term
| Two important assumptions about the perpetuity formula (PV = CF / r) |
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Definition
1) "r" is the interest rate that accrues between cash flows
2) The first cash flow of a perpetuity occurs one period after the value (need to discount if starts earlier or later) |
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Term
| To calculate FV of an annuity |
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Definition
1) Solve for PV using annuity formula
2) Use FV = PV*(1+r)^n |
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Term
| Three components of interest rate |
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Definition
1) real rate of return
2) expected inflation
3) risk of investment |
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Term
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Definition
| The total price of a "basket" of goods and services that an average US consumer would consume during the year. Used to measure inflation. |
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Term
| Bond valuation: two things we need |
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Definition
1) level and timing of cash flows
2) the discount rate |
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Term
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Definition
borrower pays regular interest payments over the life of the loan and principal is paid in full @ maturity.
(most corporate bonds) |
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Term
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Definition
| Pay no coupons over life of loan only CF is par value at maturity |
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Term
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Definition
| borrower pays interest and principal over life of loan, resulting in no principal payment of maturity |
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Term
| Term structure of interest rates |
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Definition
| the term structure of interest rates (yield curve) is the set of interest rates of various maturities for a particular risk class of instruments |
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Term
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Definition
The single discount rate that implies a pv of the bond that equal the bond price
YTM does not determine prices...prices determine YTM.
It is determined by the bonds price and cash flows.
In general YTM is a weighted average of the interest rate used to value the bond. It is NOT a market rate of interest. |
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Term
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Definition
| CF x (T-strip price / 100) |
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