Chapter Six
Quoted interest rate= r= r*+IP+DRP+LP+MRP
r= quoted or nominal rate
r*= real risk free rate
rrf=r*+IP, Treasury bill
IP= inflation rate
DRP= default risk premium is zero
LP= liquidity
MRP= maturity risk premium, long term bonds exposed to high risk
T Bill- short term risk free rate
T bond- long term quoted rate
IP is the expected rate in the future, not the rate experienced in the past
DRP= the greater the bonds risk of default, the higher the interest rate
MRP= the longer the amount of years, the higher the interest rate
Upward sloping is a normal yield curve
Inverted is an abnormal curve
Humped- medium rate higher than on both short and long term maturities
T-bond yield= r*t+IPt+MRPt
Corporate Bond Yield= r*t+IPt+MRPt+DRPt+LPt
Pure expectations theory- buy bonds on expectations for future interest rates strictly on
basis of expectations for future interest rates
T-bill= r* + IP/ T-bond= r*+IP+ MRP
Chapter 7
Treasury bonds
Corporate bonds
Municipal bonds
Foreign bonds
Par value- stated face value of the bond
Coupon interest rate= payment/par value
Call premium is typically full value plus ones years interest rate
Rd= bond’s market rate of interest, equal to the coupon rate if and only if the bond is
selling at par
INT= dollars of interest paid each year= coupon rate x par value
M= par or maturity, value of the bond
PV when solving on calculator is always –
When rd= coupon rate, fixed rate bond will sell at its par value
Discount bond= when falling below par value
When interest rate above coupon, discount bond, when interest rate below, premium bond
Setup for YTM= you have N, PV (-), PMT, FV, solve for I
With YTC all else equal except PV is the new PV, and 9 is the number of years left in the
maturity of the bond when called
Current yield= annual interest payment/ bonds current price
Capital gains yield= bonds annual change in price/ beginning of the yr price
Bonds with Semiannual Coupons:

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1.
divide coupon interest rate by 2
2.
multiply N by 2
3.
divide nominal interest rate (Rd) to determine semiannual interest rate
4.
then multiply by 2
Chapter 8
Expected rate of return= rhat= P1 (R1) + P2 (R2) r is a percentage
Standard Deviation= Insert
Perfectly positively correlated stocks more risky than negative which holds zero risk
Portfolio risk declines as the number of stocks in the portfolio increases
Possible to have a negative beta, stocks returns rise when others fall, h/e never been seen
Amt invested/ whole portfolio multiplies by B= Bp= w1b1 + w2b2…
SML= Rpi= Rrf+ (Rm-Rrf)Bi
Expected return= risk free rate when beta is zero rrf on vertical axis
Chapter 9
Dt= divided expected at the end of each yr
D1= first dividend expected, D2= second expected…
Po= market price of the stock today
Pt= expected price of the stock at the end of year t
G= expected growth rate in dividends
Rs= minimum acceptable
Dividend Yield= D1/Po
Capital Gains Yield= P1hat- Po/ Po
Expected Total Return= Dividend Yield + Capital Gains Yield
Constant Growth Model= Dn= Do(1+g)
5
To solve for Po= Do(1+g) / rs-g

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