fixed assets

assets expected to be used for more than one year

equity: raising money from investors; going public; retained earnings debt: banks; bond market

how to pay for fixed assets

- creditors don't own the firm or have any voting rights - company under legal obligation to pay creditors principal and interest - interest is cost of doing business ; tax deductible - too much of it increases risk of financial distress and bankruptcy

all about debt

- equity holders own the firm - voting rights - company does not have to pay common shareholders dividends - dividends are paid after taxes and provide no tax benefits - too much equity does not increase the risk of financial distress and bankruptcy

all about common equity

market where bonds are issued and traded. there is no physical location. much larger than stock markets in terms of volume. bond market allows owners to keep more of their companies.

bond market

interest only loan where the borrower will pay the interest every period. none of the principal is paid until the end of the loan

bond

principal amount of a bond that is pard at the end of the term

par value (face value)

interest payment received each period

coupon payment

annual coupon payment divided by the face value of the bond

coupon rate

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

maturity date

required rate in the market of a bond, also called market rate anticipated rate that a bond pays if held to maturity given the current bond price

yield to maturity

when you pay interests, you pay less in taxes

tax deductibility

- allows companies to raise debt beyond what banks can provide - pay the principal at the end of the life of the loan - interests payments are tax deductible

benefits of raisin money through the bond market

default risk and interest rate risk

types of risks associated with bonds

risk that the company may default on its interest and principal payments to the bondholders

default risk

the more bondholders require in terms of compensation

the higher the risk of default....

- company is under legal obligation to pay the coupon payments and principal - company can be taken to court if not paid - bondholders can seize the company assets and liquidate the company - with more debt, companies risk experiencing financial distress and bankruptcy

descriptions of risks associated with bonds

Moody's and Standard and Poo

bond rating firms

assessment of credit worthiness of the corporate issuer

bond rating

grade bonds & junk bonds

types of investment bonds

- negative relationship between the market interest rate and the price of the bond - bond price up = interest rate down - interest rate up = bond price down

interest rate risk

price*rate = coupon payment per year

how do you find the coupon payment from the coupon rate and price

goes down

if interest rate goes up, what happens to the bond price

goes down

if bonds go up, what happens to the interest rate

treasury and municipal

two types of gov. bonds

issued by the federal government and are default free. fixed interest rate paid every 6 months until maturity. maturity of 20 - 30 years. low risk investment.

treasury bonds (t-bonds)

t-bills and t-notes

two types of treasury bonds

pure discount bonds with maturity of one year or less

t-bills

coupon bonds with maturity between one and ten years

t-notes

munis

municipal bonds are also known as

issues by state and local gov. have different degrees of default risk (not all are safe) rated similar to corporate debt (use same grading system - AAA, A, BBB, - think Moodys and Standard and Poor) offer tax advantage interest received is tax exempt at the federal level

municipal bonds

- pay no coupon pmt during the holding period - investors make money by buying the bond at a price that is at a discount and receive the par value at maturity - can be called deep discount bonds, original issue discount bonds, or zeros

zero coupon bonds

t-bills

what is an example of zeros or deep discount bonds

high high

stock market has ____ risk, ____ reward

low low

bonds have _____ risk, ______ reward

invest more into stocks while you are young and increase investment into bonds as you get older

what is the key with investing in bonds and stocks

bonds debt

bond market allows companies to issue ______ and raise _____

taxes financial distress

bonds enable companies to save on ______, however they also increase risk of ______ ______

diversify risk

bonds enable investors to ______ their portfolio and reduce their overall _____

refers to the bond contract between company and bondholder

bond indenture

a bond not backed by specific collateral

debenture

some is repaid at maturity, some in part or entirely at maturity

repayment with bond valuation

whether the company can repurchase or "call" part or all of the bond issue (right to pay off the bond early)

call provisions on bond valuation

actions the company is allowed to take during the life of a loan. (rule written into a bond agreement that restricts what the issuer can do—so they don't take actions that would make it harder to repay you) the actions are listed to protect lenders (bondholders)

details of protective covenants

Determining the fair value of a bond. -estimate all of the bonds cash flows and discount them back to the present

bond valuation

Includes coupon payments and par value- future value- received at the life of the bond (principal repayment)

bond's cash flow

C( (1-(11+r^t))

how to find value of a bond

rate or yield to maturity

what is r (lowercase)

number of periods

what is t

par value or face value

what is FV

=PV type is 0

how to find bond value in excel and what is the "type"

$1,000 * rate no, pmt is 0, only fill the rate, nper, and fv (par value)

with a given par value of $1,000 how do you find the coupon payment? and when finding that in excel do you put the found payment in the pmt spot?

(coupon rate * FV) /2

how do you find a semi coupon payment

it will say "multiple" or "two" payments

how do you know if a problem has semi annual payments

=RATE

how do you find the yield to maturity in excel

time (t), coupon pmt, and the rate FV (par value) and PV

if a problem is semi annual , what must you adjust? What stays the same?

Present value (that is what is being paid)

what must be made a negative in excel formulas

multiply the final answer by two

to change a semiannual word problem to answer the question of what is being paid annually, what must you do?

general rise in prices over time

inflation

interest rates or rates of return that have been adjusted for inflation

real rate

interest rates that have not been adjusted for inflation

nominal rates

nominal : mortgage rates, loans, car payments

do we see more nominal rates or real rates

R=r+h

what is the approximate rate formula

R - nominal rate r - real rate h - inflation

in the approximate formula, what is R? r? h?

R=[ (1+r)(1+h) -1

exact formula for rate

real rate of interest expected future inflation premium interest rate risk premium

what are the determinants of bond yields

the compensation investors demand forgoing the use of their money

real rate of interest

higher higher

when real interest is high, all interest rates tend to be ______, and the bond yield is _____

demands a higher coupon rate to compensate for the loss of income in the future

expected future inflation premium

extra return investors require to compensate for the risk that interest rates will change and reduce the bond's value before it matures. the longer maturity a bond has, the higher the interest rate risk is

interest rate risk premium

shows relationship between the interest rates and the time to maturity while holding risk constant - as much as possible

term structure of interest rates

offers a graphical representation of the term structure

yield curve

upward sloping long term yields are higher than short-term yields

normal yield curve

downward sloping long-term yields are lower than short term yields

inverted yield curve

more premium

when the market rate is lower than the coupon rate, this means the bond pays ____ than the market price, which it is selling at a ______

change the t, r, and pmt to all fit semi annual. the rate and pmt are both divided by 2 and t is multiplied

what is the first step when solving a problem that is semiannual

use the pmt function in excel and once you have that multiply the coupon pmt by 2 and then plug that into the formula r=pmt/fv

if finding the coupon pmt without the coupon rate, what must you do?

default risk premium taxability premium liquidity premium

what are the determinates of bond values

extra interest (yield) investors require to compensate for the risk that the borrower might not pay back the bond's principal or interest on time—or at all.

default risk premium

high yield bonds

junk bonds are now known as

extra yield investors require because the interest they earn from the bond is taxable.

taxability premium

higher higher

the higher the risk of default, the _____ the risk of the bondholder, and the _____ the bond return or yield to be demanded

extra return investors require for holding a bond that is harder to sell quickly without losing value.

liquidity premium

ability to sell assets quickly

liquidity

partial ownership in a company

purchasing common stock means acquiring ________

dividends and capital appreciation

two ways investors can earn returns

payments distributed to shareholders from company profits

dividends

selling your shares for more than you paid

capital appreciation

primary and secondary

stock market is dividend into these two markets

NYSE and NASDAQ

two most significant stock exchanges

where companies initially issue and sell new securities directly to investors (ex. Government bond issuance)

primary market

where investors trade previously issued securities with one another (ex. NYSE)

secondary market

second largest stock exchange in the U.S. A nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically. located in Time Square (offices) made up of a lot of technology companies

NASDAQ

limited liability dividend potential capital appreciation residual claim voting rights large companies can have many shareholders multiple stock classes stock splits stock repurchase or buyback

features of common stock

you may lose your investment in the company but your own assets are protected

limited liability with common stock

last in line for assets. if a company liquidates, stockholders are paid after creditors ad preferred shareholders

residual claim with common stock

shareholders elect the board of directors who then hire company managers. there is one vote per share

voting rights with common stock

when shareholders who cannot attend a meeting transfer their voting rights to another party

proxy voting

so a certain part of the company can remain "family owned" or private (ex. Ford)

why do some firms issue different stock classes in a company

when a company realizes its stock has appreciated to a point where everyday investors find it unaffordable and split it to make it cheaper

stock splits

when a company purchases their own stock from the market which reduces total shares outstanding and increase ownership percentage for remaining shareholders

stock repurchase or buyback

a measure of the size of a company - total market value

market capitalization

share price time total shares outstanding

how to find market cap

valued at $10 billion or more (Apple, Amazon, Google)

large cap stocks

valued at $2 billion to $10 billion (Crocks, Dropbox, Five Below)

mid cap stocks

valued below $2 billion (Build a bear, TripAdvisor, Yelp)

small cap stocks

earnings not affected by swings of the economy company may perform better during downturns ex. Walmart

defensive stock

earnings move with the economy ex. Ford

cyclical stock

carry more risk and variability than a typical stock ex. small bio tech stocks

speculative stocks

pay relatively high dividends, with little increase in earnings ex. Verizon

income stocks

have exhibited sales and earnings growth well above industry average (generally smaller stocks and many times newly formed) ex. apple

growth stock

sound financial history of solid dividend and growth records ex. Johnson & Johnson

blue-chip stock

preferred shareholders have preference over common stock in events of bankruptcy and liquidation they rank below debt holders pay fixed dividends at regular intervals no voting rights unless dividends are in areas for a specified period of time

features of preferred stock

a benchmark or indicator that tracs the performance of a group of stocks representing either the overall market or a specific sector

stock indexes

oldest and most widely recognized stock index effective barometer of market performance track 30 major us companies

The Dow Jones Industrial Average

tracks 500 stocks covers 90% of US market cap, making it more representative than the Dow Jones

S&P 500

tracks the 1st through the 1000th largest US companies

Russell 1000

tracks the 1,001st through the 3000th largest companies (small cap stocks)

Russell 2000

the most comprehensive US index, including all publicly traded stocks with available price data

Wilshire 5000

falling stocks prices

bear market

rising stock prices

bull market

method of evaluating stocks by analyzing statistical patterns in their past trading activity (price patterns) works to predict demand for stocks encourages day trading

technical analysis

strengths, weaknesses, opportunities, threats

swot analysis

evaluating a stock by looking at the company's actual financial health and performance, rather than just its stock price movements. estimating the companies cash flows and using the time value of money to calculate the stock prices

fundamental analysis

firm pays fixed dividend forever

stock with fixed dividends

firm will increase dividend by constant percent every period

stock with constant dividend growth

required rate of return

expected constant dividend growth rate or capital gains yield

one of the most widely used methods for stock evaluation

p/e

Do(1+g)

how do you solve for D1

preferred stock formula

what formula do you use when searching for a fixed dividend

take the D1 number and sub it back into the formula D1(1+g)^t

once you find the current stock price with dividends, then what do you do to find the stock price in 3 years