test 2 study guide

# test 2 study guide - Investment grade bonds those above Ba...

This preview shows pages 1–2. Sign up to view the full content.

Investment grade bonds: those above Ba or BB . Junk bonds or high yield bonds: with ratings below Baa or BBB . Given: \$100 face value, 7% coupon rate, 20% tax rate, 1 year maturity. The yield is 5.6 %. 7% x(1-0.2) 20%=5.6 Yields on short-term bonds are more volatile than on long-term bonds. Long-term yields tend to be (but not always) greater than short-term yields. The long-term interest rate is the average of the _ current short term and expected short term interest rates. If investors expect the interest rate to decline, the long-term interest rate will be less than the short-term interest rate. The yield curve will slope downward . If investors expect the interest rate to rise, the long-term interest rate will be greater than the short-term interest rate. The yield curve will slope upward . If the current short-term rate is 6%, the short-term rate next year is 7%, and the short-term rate in year 3 is 8%, then the long-term rate is likely to be 7 % . If the risk-free yield is 4%, risk premium is 3%, then the bond yield is 7 % . A _ steep yield curve means a strong _ economy. A _ flat yield curve means a soft _ economy. A _ inverted _ yield curve means a _ recession is coming _. Stockholders are _ partial ownership of a firm _. Stockholders have limited _ liability. Loss cannot exceed the price they paid for the stock. D1=5, i=0.03, P1=80. Stock value = 4.85+77.67=85.82---5/(1.03)^1+80/(1.03)^1 D1=5, D2=8, i=0.04, P2=50. Stock value = 4.81+7.40+46.23=58.44 ---(5/1.04)^1+(8/1.04)^2+(50/1.04)^2 The fundamental (or present) value of a stock is: D=5, i=0.06, g=0.01, PV of the stock= 101---5x(1+0.01/0.06-0.01) D2=10, P1=90, P2=120. Return to hold stock = 0.1111+0.3333=0.4444----10/90+120-90/90 Prices of stocks and other financial instruments reflect all available information.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern