Exam_2_StudyGuide.docx - Annuity Types: ORDINARY – series...

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Annuity Types:ORDINARY– series of equally spaced & level cash flows over finite # of periods w/ pay @ period end (ex: wages) ~ ANNUITY DUE– payments aremade at beg of period (ex: rent payment) ~Ordinary annuity value x (1 + i)Present Value of Annuities: PV of the cash flow form an annuity disc. At the appr discount rateFuture Value ““:value of an annuity at some point in the futureAmortization Schedule– firstPay mostly interest & loan towards end of loan (IR issmall at end)i=IR ~ annual rate = IR pay,payment –IR = principal payment, end balbeg bal nxt yrTotal Return- earned from holding an invst fora specified period ~ holding per return =current inc during per+capital gain(¿loss)during perbeginninginvst valuecptl gain/loss drg per=end invst val – beg invstVal ~ex:P0=$100; P1=$97;nodividendTR=(P1P0+D)P0=(97+100+0)100=¿1.97%Expected Return –average of possible returns from an investment where each returnis weighted by the probability that it will occurVariance(σ2¿– msr of uncertaintyassociated w/ an outcome ~Standard dev (σ¿distance of datapoints frm the meanSDV measr total/standalone risk ~ largerσ=lower probability that actl ret will beCloser to expct ret, assoc w/ wider prob distrof returnsGeometric average return– accounts for time value of money ~avgCompounded return by an investor ~r2015=13%,r2016=8%,r2017=17%Return relative: 1+.13=1.13; 1+.08=1.08; 1+.17=1.17(1.13)(1.08)rg=¿(1.17)¿¿131=12.61%Correlation Coefficient –comes into play w/ 2+ securities ~ ranges from -1 to +1 ~ positive corl is given by +1 & negt by -1; stock returns are not corl thecorl coef. Is 0 ~ most stocks are post corl w/ the mktBeta - measr that indicates the extent to which a stock’s ret moves up & down w/ mkt ~ measr mkt risk & indicates how risky astockis if it is held in well-diversified portfolio ~ B>1.0 riskier than average : B<1.0 less risky than avg (most stockshave .5-1.5 range) ~ if beta is neg: regression line slopesdownward[beta]individual security:[beta] portfolio: the weighted avg of each of the stock’s betasBond: long-term debt instrument in which a borrower agrees to make ments of principal & IR, on specific dates, to holders ofThe bond ~ bond’s convexity = sensitivity to changes in YTM – more sent = long-term bond w/ no coupon ~ leas sent = shortrbond w/ couponBond charact:par value(stated faceface value of bond – rep amt of $ firm borrows & promisesto repay @ matr date),coupon rate(CP= specified # of $of IR paid each yr, CR=divide CP by par value),callprovisions(gives issuer right to call bond for redemption- right to redeem under specified termsPre-normal maturity date, varies w/ creditquality, high credit risk=more common CP is ~ deferred cal:bond not callable until several yrs aftr issue), sinking funds (facilitate orderly retirement of bond issue – provs in bond thatreq issuer to retire port of bond each yr ~ can: call portion of bond for redemption/buy req # of bonds in open mkt)(A) Par Bond:price is always at par(B)Discount Bond:if going rate of IR > CR, fixed-rate bond’s pr will fall below par value & become a discount bond(C)Premium Bond:going rate ofIR falls below the CR, fixed-rate bond’s pr will rise above its par value & be a premium bond – sells at issuance time & higher pr than par value~~~~x= bond issuance time – maturitytime :y = price of bond ~~~~CR>YTM = premium bond : CR=YTM = par value : CR<YTM = discount bond- expect to earn YTC on prem bond & YTM on par & discbonds ~ in gen: bond sells at a premiumBond Value:Bond Ratings:designed to reflect the probab of a bond issueGoing into default ~ factors that affect it: debt ratio – TIERatio – current ratio – pension liabilities – earnings stability –Regulatory environment – potential antitrust/prod liabl – potnLabor problems – acct policiesDefault risk– higher prob of default the higher the defaultpremium & thus the YTM ~ influenced by issuer’s financialstrength & terms of bond contract – compensates for if issuer defaults & invtr receive less than promised return- long term bonds are MORE sensitive ~ bond payments w/coupons dampen paymentsYield to Maturity:rate of return earned on a bond if held to maturity (rd¿– YTM changes when IR in eco changes – YTM will change over life ofbond btw purchase date & maturity date ~Constant Dividend Growth Model:(type of pricing model) a stock whose dividends are expected to growforeverat a constant rate, g ~ if g is constant: dividend growthformula converges to:~ formula:example: D=$1.00, Discount rate (g) =4%,r=8%~ tells the curnt pr of share ofstock is the nxt per dividendD1=D0(1+g)=1.00(1+.04)=1.04Divided by the diff btw the DRthe dividend growth rateNon-Constant Dividend GrowthRate: (model) suppose dividend grwth rateg=30% for 3 yrs, stabilizes at a LR grwth of 6%: means can no longer use

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Olander

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