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Exam 2 review and cheat sheet

# Exam 2 review and cheat sheet - Chapter Six Quoted interest...

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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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Exam 2 review and cheat sheet - Chapter Six Quoted interest...

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