Cheat Sheet Corporate Finance T2

Cheat Sheet Corporate Finance T2 - Note here you may be...

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Note here you may be asked to compute the Effective Annual Rate (EAR). The equation is EAR= (1+r)^#compounding periods (ex. Semiannual= 2) -1. Interest Rate Risk- All other things being equal, the longer the time to maturity, the greater the interest rate risk. All other things being equal, the lower the coupon rate, the greater the interest rate risk. Current Yield vs. Yield to Maturity(YTM)- A bond's yield to maturity should not be confused with its current yield, which is simply a bond's annual coupon divided by its price. .The YTM must be greater than the current yield if the bond is selling at a discount. The YTM must be less than the current yield if the bond is selling at a premium.Debt securities are typically called notes, debentures, or bonds . Strictly speaking, a bond is a secured debt. Also, usually the only difference between a note and a bond is the original maturity. Issues with an original maturity of 10 years or less are often called notes. Longer-term issues are called bonds. Debenture- is an unsecured bond, for which no specific pledge of property is made. Sinking Fund- an account managed by the bond trustee for the purpose of repaying the bonds. The company makes annual payments to the trustee, who then uses the funds to retire a portion of the debt. The trustee does this by either buying up some of the bonds in the market or calling in a fraction of the outstanding bonds. Call provisions are often not operative during the first part of a bond's life. This makes the call provision less of a worry for bondholders in the bond's early years. For example, a company might be prohibited from calling its bonds for the first 10 years. This is a deferred call provision . During this period of prohibition, the bond is said to be call protected . When comparing Municipal and Corporate bonds calculate the after tax yield of both bonds. o After Tax Yield= Yield x (1-TR) o Break Even Tax Rate= 1- (Tax Exempt Bond Rate/ Taxable Bond Rate) Zero Coupon Bond- a bond that pays no coupons; must be offered at a price much lower than its stated value. A financial market is transparent if it is easy to observe prices and trading volume. Most bond transactions are negotiated between parties and there is little or no centralized reporting of transactions. The lack of transparency also makes it difficult to get up to date prices.In the
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Cheat Sheet Corporate Finance T2 - Note here you may be...

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