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FINA 3724 Exam 3 Studyguide

by: Lindsay Taylor

FINA 3724 Exam 3 Studyguide FINA 3724

Marketplace > East Carolina University > Finance > FINA 3724 > FINA 3724 Exam 3 Studyguide
Lindsay Taylor
GPA 3.47

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study guide covers topics needed to know for the exam walker's class at ECU
Fundamentals of Financial Management
Matthew Walker
Study Guide
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This 4 page Study Guide was uploaded by Lindsay Taylor on Saturday March 26, 2016. The Study Guide belongs to FINA 3724 at East Carolina University taught by Matthew Walker in Winter 2016. Since its upload, it has received 41 views. For similar materials see Fundamentals of Financial Management in Finance at East Carolina University.


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Date Created: 03/26/16
FINA 3724 - Exam 3 review Chapter 7 Who Issues Bond (Long term debt instrument) à federal government, countries, cities, counties, corporations Issuers of Bonds •   Treasury •   Corporate •   Municipal •   Foreign Par Value, Coupon Interest Rate, Maturity Date, Call Provision Par Value à “FV”, Face Value; value of the bond on the date it matures Coupon Rate à “PMT”; payment, dividend paid out, “mini check” Maturity Date à “N”, time till bond matures Yield to Maturity à “I/Y”, rate you earn Purchase Price à“PV”, selling price Call Provision à issuer (borrower) forces and early retirement of the bond; they do this because they can reissue the bond at a lower interest rate. Ex: a bank issu es a 5year bond at 10% return to the investor, then the rates go down (say to 6%) and they call the bond early, pay it off at a premi um (usually) and reissues the 5year bond at the new, low rate of 6% return to investor. “Callable” We also discussed a “putable” bond which is a provision that works the same just reversed; it favors the investor; say an investor purchases a 5year bond at 6% return and then rates go up to 10% so they call it early at a discount (get paid less than if they had held it for all 5 y ears) and then go buy another 5year bond at the new high return rate of 10%. Other Features- Convertible bonds, Warrant, Putable Bonds (see above), Income Bond, Indexed Bond •   Convertible bond: bond that can be converted into company stock if the person holding it wants to •   Warrant: similar to stock options but its newly issued stock that you get over the counter from the company; you can get a certain amount at a certain pri ce. •   Income bond: pays coupon payment only when company has the extra income to do so •   Indexed bond: interest rate is the rate of inflation. Or deflation Solving for Bond Value è   $1,000 lump sum (the par value) è   due at maturity (t = 10), è   annual $100 coupon payments beginning at t = 1 and continuing through t = 10, è   the price is the PV which we find with calculator PV calculation Solution in calculator: PV= ? … -1000 FV= 1000 PMT= 100 N= 10 I/Y= 10 Coupon rate & Yield to Maturity Relationship: Premium Vs Discount Bond Yield (YTM) Rate earned if held to maturity Yield to Call Par: YTM = Coupon Rate Discount: YTM > Coupon Rate Premium: YTM < Coupon Rate Changes in Bond Values over time •   Semi Annual Payment Adjustment (or Quarterly) At maturity, the value of any bon d must equal its par value. Chapter 8 Chapter 8 – Risk and Rates of return Risk-Return Trade-Off Stand-alone risk measures (Five Key Items) •   Probability distributions KNOW THESE NUMBERS 1 ơ is 68% 2 ơ is 95% 3 ơ is 99.7% •   Expected Rates of Return, “r hat” •   Historical, or past realized rat es of return, “r bar” •   Standard Deviation, ơ “sigma” •   Coefficient of variation (CV) CV= ơ / r hat Risk aversion: investors dislike risk = require higher rates of return on risky investments Risk premium: you get more return with a risky investment than you would have with a less risky investment; that extra return Is the risk premium Capital Asset Pricing Model (CAPM) Expected Return on a portfolio “r p hat” Correlation Correlation Coefficient, p “rho” Total Risk is made of 2 components •   Diversifiable Risk = Unsystematic Risk = Business Risk = Firm Specific Risk •   Un-Diversifiable Risk = Market Risk= Systematic Risk Stand-alone risk = Market risk + Diversifiable risk •   Market risk: cannot be eliminated through diversification. •   Diversifiable risk: can be eliminated through diversification. Relevant Risk Beta Coefficient, β Beta only matters when adding stocks to a portfolio If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio itself would have a beta coefficient that is equal to th e weight average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market. Adding random stocks to your portfolio will reduce the portfolio ’s unsystematic, diversifiable, risk Average stock beta = 1 Beta portfolio = p = W*b + W*b+ …… Required return on stock = RFR+RP for stock SML Equation, Req Return = RFR+Market RP*B for stock Lower beta = least market risk Lower standard deviation = least stand alone risk Chapter 9 Control of the firm (Proxy, Proxy Fight, Takeover) Classified Stock Usually class A and class B, differing voting rights between the two classes of stock Stock Price VS Intrinsic Value Stock price is the quoted price on an exchange, the intrinsic value is the true value based on perception of worth Discounted Dividend Model PV of a perpetuity = PMT/ I Constant Growth Gordon’s Growth Model P0 = div 1 / (r-g) r= required return g= growth Zero Growth Non-constant growth Corporate Valuation Model Market Value = FCF discounted with WACC as rate


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