Financial Management Cheat Sheet

LECTURE 6: BONDS Compounding: Future Value of a Single Payment = FVn=PV(1+I)^2 FV rente=PMT((1+i)^n-1/i); PVannuity=PMT(1/i-1/i(1+i)^n) Determinants of firm hold dear: trim on on the cost of debt (rd) Firm Valuation = FCF11+WACC1+FCF21+WACC2++FCF?(1+ECC)^? key out features of a bond ***Par value: Face fare; remunerative at due date. Assume $1,000*** Coupon by-line tempo: give tongue to interest rate. Multiply by hit value to bellow for dollars of interest. Generally fixed *** Maturity: old age until bond must be repaid*** Issue date: experience when bond was issued*** nonremittal risk: Risk that issuer will non make interest or principal payments. Call preparedness ***Issuer can riposte if rates decline. That helps the issuer but hurts the investor*** A bitch provision is a cry option, giving the bond issuer the obligation to payoff (call in) the bond prior to maturity***A due bond can be costd as a neat bond plus a call option. condemnationline f or Cash Flows vanquish marks denote the ends of periods, so Time 0 is like a shot; Time 1 is the end of design 1; or the beginning of Period 2 Whats the PV of $100 due in 3 long time if the annual interest rate (rd) = 10%? FVN = PV(1+I )N for PV; PV =$100(1/1.10)^3=75.13. $75.13 today, remove $100 after 3 years Bond consists of annual payments of $100/year plus a $1,000 lump sum at t = 10: PV annuity - $614.46, PV maturity value - $385.54, Value of Bond =$1,000 token(a) and real(a) yields*Nominal yields are interest rates expressed in current dollars. Most interest rates are quoted in nominal terms. *Real yields are nominal yields expressed in inflation-adjusted terms. What would go through if exp inflation rose by 3%, causation r = 13%? When rd rises, preceding(prenominal) the coupon rate, the bonds value falls below par, so it sells at a discount. What would receive if inflation fell, and rd declined to 7%? If coupon rate > rd, price rises above par, and bond se lls at a premium. Investors will desire a h! igher nominal yield if they expect inflation. A snug approximation is to think...If you want to get a affluent essay, position it on our website: BestEssayCheap.com

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