Protective Covenant Part of the indenture or loan agreement that limits certain

# Protective covenant part of the indenture or loan

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Protective Covenant: Part of the indenture or loan agreement that limits certain actions a company might otherwise with to take during the term of the loan. Sinking fund: Allows company to repurchase bonds periodically and at a specified sinking fund price. Buys
back only some part of the bond e.g. 5%. Weighting of the bond will reduce. Use Weighted Average. •Bond Value = PV of coupons (annuity) + PV of par (lump sum) •Bond Value = Coupon [ 1 1 ( 1 + r d ) N r d ] + FaceValue ( 1 + r d ) N •Overall Rate of Return = ( AnnualCoupon + ( Current Bond Price Beginning Bond Pr = ( AnnualCoupon + Bond Price Change ) Beginning Bond Price •Premium = Bond whose price is more than \$1000 •Yield-to-Maturity (YTM): yield which equates to the present value of all the cash flows from a bond to the price of a bond. Used for comparisons with other potential investments of the same risk level. Rate implied by current bond price. Diference between purchase price and par value. •i/r increases, bonds PV decreases. YTM increases, bond price decreases. •If bond priced at par, YTM = Current Yield = Coupon Rate •If bond selling at premium, YTM < Current Yield < Coupon Rate •If bond selling at discount, YTM > Current Yield > Coupon Rate •Bonds of similar risk (and maturity) will be priced to yield about the same return (same YTM), regardless of the coupon rate. If you know the price of one bond, you can estimate its YTM and use that to find the price of the second bond. •Factors afecting Bond Ratings: Financial performance (debt ratio, TIE ratio, current ratio), Bond contract provisions (secured/unsecured, senior/subordinated, guarantee/sinking fund provisions, debt maturity) •T-bills(1year or less), T-notes(1-10years), T- bonds(>10years) •Taxable bond: After Tax Return = (1-T)*Yield •Floating bonds: Less price risk •Factors that afect Bond Yield: Real i/r, expected future inflation, i/r risk, default risk, taxability, lack of liquidity. Lecture 7: Stock Valuation •When you buy a share of stocks: either get dividends or you sell your share. •Value of stock = PV of expected cash flows •Dividends are not liabilities (not business expense hence not tax deductible, individuals are taxed as ordinary income.) •Constant Dividend (Zero Growth) = use perpetuity formula P 0 = D 1 r E ,useCAPM ¿ calculater E ( Cost o •Constant Dividend Growth (Stable Growth) = increased by constant percent every period. Dividend Growth Model. P 0 = D 0 ( 1 + g ) r E g = D 1 r E g , r E > g r E = D 1 P 0 + g •Supernormal Growth (Non-Constant Growth) = not constant initially but becomes constant over time. 1) Timeline find dividend price for each year until constant growth. 2) Apply Dividend Growth Model for constant growth to find Terminal Value and add to previous year dividend price. 3) Find PV at t=0 •Market Equilibrium, expected returns (Using DGM) = required returns (CAPM) P 0 too low, current price undervalued. Buy orders > Sell orders, P0 bid up until equilibrium.

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• Spring '11
• tohmunheng
• Investing

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