Chapter 5

# Chapter 5 - Chapter 5 Including appendix Assignment 3...

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Chapter 5 Stocks Including appendix Assignment 3 Brief discussion of discount rate Relationship between short-term investor and long-term investor Dividends vs. capital gains Estimating growth Difference between income and growth stocks Growth opportunities Price-Earnings ratio Pitfalls in applying dividend discount model and related approaches Bonds Pure discount bonds Coupon bonds Interest rates and bond prices Coupon vs. yield to maturity Term structure of interest rates Spot rates and yield to maturity Forward rates Explanation of term structure Corporate Debt Pure Discount Bond – expires on its maturity date when face value is paid to holder; also called zero-coupon bonds, zeros, bullets, and discounts . (1 ) T F PV r = + Level-Coupon Bonds pay regular coupon payments and principal at maturity \$1,000 (1 ) T T r PV C A r = + + g * Effective Annual Interest Rate = (1 ) 1 m r m + - , where m is the number of compoundings per year Consols are never ending bonds that have regular payments but no maturity payment C PV r = Interest rates and bond prices: a bond pays based on the rate that was offered at the time of purchase, but is valued at the prevailing interest rate, r. Yield to Maturity – if we know the price that a bond’s selling at, the rate of return that the holder’s earning is the yield. I.e. in the Level coupon bonds equation, you know PV but not r.

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Bond Market Reporting Bonds Current Yield Volume Close sign Net Chg ATT 81/8 22 8.1 97 100 + .38 - ATT bond that matures in 2022 with coupon rate of 8 1/8 %. Annual coupon for this bond is \$81.25.
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