Exam BMGT340 2 Cheat Sheet
Chapter 7:
Bond Value= Present Value of coupons + Prevent value of Par
Par/Face Value of Corporate Bonds= $1000
Current Yield= (Annual Coupon/Price)
Annuity Present Value= C [(1- (1/(1+r)t))/r]
Bond Value= C [(1- (1/(1+r)t))/r] + F/(1+r)t
Where C= Coupon paid each period, r= rate per period, t= number of periods,
and F= Face Value
Yield to Maturity (YTM)= Current Yield + Capital Gains Yield
Fisher Effect: (1+R)= (1+r)(1+h)
Where R= Nominal rate, r= Real rate, and h= Expected inflation rate
Approximate: R= r + h
Effective Annual Yield= (1 + YTM)t 1
Chapter 8:
General Growth:
P0= D1/(1+R) + D2/(1+R)2 + D3/(1+R)3etc.
Constant Dividend Growth:
P0= D1/(R-g)
Dt=D0(1+g)t
Present Value (Pt)= (Dt(1+g))/(R-g)
Where Dt= Dividend at period t, g= Growth Rate, and R= Required Return
Dividend Growth Model: P0= D0(1+g)/R-g
Zero Growth:
D1=D2=D3=D4, P0= D/(1+R) + D/(1+R)2+ D/(1+R)3etc.
P0= D/R
Non-constant Growth:
If the dividend grows steadily after t periods, then P0= D1/(1+R)1 + D2/(1+R)2 + + Dt/(1+R)t + Pt/(1+R)t
^Where Pt= Dt(1+g)/(R-g)
Two-Stage Growth:
P0= D1/(R-g1) x [1 ((1+g1)/(1+R))t] + Pt/(1+R)t
^Where: Pt= Dt+1/R-g2 OR Pt= [D0(1+g1)t(1+g2)]/R g2
Rearranging P0 Equation to solve for R:
R= (D1/P0) + g
Where (D1/P0) is the Dividend Yield and g is the Capital Gains Yield
Chapter 12:
Total Dollar Return= Income from Investment (or Dividend Income) + Capital Gain (Loss)
Total Cash if Stock Sold= Initial Investment + Total Dollar Return
Dividend Yield= Dividend Income/Beginning Price = D1/P0
OR
Dt+1/Pt
Capital Gains Yield= (Ending Price Beginning Price)/Beginning Price = (Pt+t Pt)/Pt
Total Percentage Return (R)= Dividend Yield + Capital Gains Yield
Standard Deviation= Square root of Variance
Variance= Sum of squared deviations from Mean/ (Number of observations 1) = [(R1-RA)2 + (R2-RA)2 + (Rn-RA)2]/ (N 1)
Arithmetic Average= (a + b + c)/N
Where a, b, and c are numbers and N is the number of occurrences.
Geometric Average= [(1+a)(1+b)(1+c)]1/N - 1
Chapter 13:
Risk Premium= Expected Return Risk free rate = E(RU) RF
Expected Return E(R)= X1(E(R1)) + X2(E(R2)) etc
Where X1, X2, etc. are chances of a state of economy, and E(R1) and E(R2) are returns during that particular state.
Total Return= Expected Return + Unexpected Return
Expected Return on a Portfolio (E(Rp)= w1(R1) + w2(R2) + w3(R3) etc.
Where w1, w2, w3, etc. are the weights of each individual stock in a portfolio and R1, R2, etc. are the Expected Returns for each
individual stock in the portfolio.
Portfolio Variance= (Chance of state of Economy)(Expected Return of portfolio in that state Total expected return of
portfolio)2 + (Chance of state of Economy)(Expected Return of portfolio in that state Total expected return of portfolio)
Announcement= Expected part + Surprise
Total Risk= Systematic risk + Unsystematic Risk
Slope= (E(RA) Rf)/A Where E(RA) = Expected return on asset A, Rf= Risk free rate of asset A, and A= The Beta of asset A
SML Slope= E(RM)- Rf
Where E(RM) = Expected Return on market portfolio, and Rf = Risk free rate
Capital Asset Pricing Model: E(Ri)= Rf + [E(RM) Rf] x i
Definitions:
Chapter 7:
Coupon- The stated interest payment made on a bond.
Face Value (Par Value)- The principal amount of a bond to be paid at the end of the term.
Coupon Rate- The annual coupon payment divided by the face value of the bond.
Yield to Maturity- The rate required in the market on a bond.
Current Yield- A bonds annual coupon divided by its price.
Indenture- The written agreement between the corporation and the lender detailing the terms of the debt issue.
Registered Form- The form of bond issue in which the registrar of the company records the ownership of each bond; Payment is
made directly to the owner of record.
Bearer Form- The form of bond issue in which the bond is issued without record of the owners name; Payment is made to
whomever holds the bond.
Debenture- An unsecured debt, usually with a maturity of 10 years or more.
Note- unsecured An debt, usually with a maturity under 10 years.
Call Provision- An agreement giving the corporation the option to repurchase a bond at a specified price prior to maturity.
Call Premium- The amount by which the call price exceeds the par value of a bond.
Deferred Call Provision- A call provision prohibiting the company from redeeming a bond prior to a certain date.
Call-protected Bond- A bond that, during a certain period, cannot be redeemed by the issuer.
Protective Covenant- A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to
protect the lenders interest.
Zero Coupon Bond- A bond that makes no coupon payments and is thus initially priced at a deep discount.
Clean Price- The price of a bond net of accrued interest; typically this is the quoted price.
Dirty Price- The price of a bond including accrued interest. This is the price the buyer actually pays.
Real Rates- Interest rates adjusted for inflation.
Nominal Rates- interest rates not adjusted for inflation.
Inflation Premium- The portion of a nominal interest rate that represents compensation for expected future inflation.
Interest Rate Risk Premium- The compensation investors demand for bearing interest rate risk.
Default Risk Premium- The portion of a nominal interest rate that represents compensation for the possibility of default.
Taxability Premium- The portion of a nominal interest rate that represents compensation for unfavorable tax status.
Liquidity Premium- The portion of a nominal interest rate that represents compensation for lack of liquidity.
Chapter 8:
Common Stock- Equity without priority for dividends or in bankruptcy.
Preferred Stock- Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without
voting rights.
Cumulative Voting- A procedure in which a shareholder may cast all votes for one member of the board of directors.
Straight Voting- A procedure in which a shareholder may cast all votes for each member of the board of directors.
Proxy- A grant of authority by a shareholder allowing another individual to vote his or her shares.
Dividends- Payments by a corporation to shareholders, made in either cash or stocks.
Primary Market- Market in which new securities are originally sold. Secondary Market- Where old securities are traded.
Over-the-counter (OTC) Market- Securities market in which trading is almost exclusively done through dealers who buy/sell
for their own inventories.
Chapter 12:
Risk Premium- The excess return required from an investment in a risky asset over that required from a risk-free investment.
Variance- The average squared difference between the actual return and the average return.
Normal Distribution- A symmetric, bell-shaped frequency distribution that is defined by its mean and standard deviation.
Efficient Capital Market- A market in which security prices reflect available information.
Chapter 13:
Portfolio- A group of assets such as stocks and bonds held by an investor.
Systematic Risk- Risk that influences a large number of assets, also known as market risk.
Unsystematic Risk- Risk that affects at most a small number of assets.
Principle of Diversification- Spreading an investment across a number of assets will eliminate some, but not all risk.
Systematic Risk Principle- The expected return on a risky asset depends only on that assets systematic risk.
Beta coefficient- The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.
Security Market Line (SML)- A positively sloped straight line displaying the relationship between expected return and Beta.
Market Risk Premium- The slope of the SML; The difference between the expected return on a market portfolio and the riskfree rate.
Capital Asset Pricing Model (CAPM)- The equation of the SML showing the relationship between expected return and Beta.
Cost of Capital- The minimum required return on a new investment.