Exam 3 Study Guide_FIN300.docx

Exam 3 Study Guide_FIN300.docx - Exam 3 Study Guide Notes...

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Exam 3 Study Guide Notes Present value Cash flows Net Cash Flows: IRA IRR MIRR Principal : (of money) denoting an original sum invested or lent. Maturity: Maturity value is the amount payable to an investor at the end of a debt instrument's holding period ( maturity date). For most bonds, the maturity value is the face amount of the bond. For some certificates of deposit (CD) and other investments, all of the interest is paid at maturity . In finance , the yield on a security is the amount of cash (in percentage terms) that returns to the owners of the security, in the form of interest or dividends received from it. The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond ) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Upon maturity, the bondholder is paid the par value , regardless of the purchase price; a bond with a par value of $100 that is purchased for $80 will yield a 25% return at maturity. Because stocks often have par values near zero, the market value is almost always higher than par but is highly changeable. o 25%/100 = .25 x 80= 20 o 20 + 80= 100 Compound Interest Formula: o Total compounded interest = P (1 + r/n) (nt) – P o Only have to – P if not including principal
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o A = the future value of the investment/loan P = the principal investment amount (the initial deposit or loan amount) r = interest rate (decimal) n = the number of times that interest is compounded per year , not over the life of investment t = the number of years the money is invested or borrowed for o When doing interest make sure that you only include the principal if needed o If interest is compounded yearly, then n = 1; if semi-annually, then n = 2; quarterly, then n = 4; monthly, then n = 12; weekly, then n = 52; daily, then n = 365 o Also, " t " must be expressed in years, because interest rates are expressed that way. If an exercise states that the principal was invested for six months, you would need to convert this to 6 / 12 = 0.5 years; if it was invested for 15 months, then t = 15 / 12 = 1.25 years; if it was invested for 90 days, then t = 90 / 365 of a year ; and so on. Chapter 8 Corporate Bonds o Features of Corporate Bonds Long-term claims against company assets Face, or par, value is $1,000 Coupon rate is the annual coupon payment (C) divided by a bond’s face value (F) Coupon payment is a fixed amount paid to lenders for the life of the contract (typically with a semiannual or annual payment) o Market for Corporate Bonds Life insurance companies and pension funds buy most corporate bonds Transactions tend to be in very large dollar amounts Only a small fraction of the bonds outstanding are traded each day
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The market is thin compared to markets for money-market securities and stocks Corporate bonds are less marketable than securities with large daily trading volumes
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