Fianance Midterm 2 Tsarsis

Yield to Call (YTC)

A financial term that refers to the return a bondholder receives if the bond is held until the call date which occurs sometime before it reaches maturity.

When interest rates rise

bond prices fall (and vice-versa), with long-maturity bonds most sensitive to rate changes.

Bond

• a fixed income instrument that represents a loan made by an investor to a borrower.

Government bonds

issued by a national government, typically considered low-risk investments. They pay periodic interest and return the principal at maturity.

• Corporate bonds

debt securities issued by companies to raise capital, where investors lend money in exchange for regular interest payments and the return of principal at maturity.

• Municipal bonds

debt securities issued by local governments or their agencies to fund public projects, where investors lend money in exchange for interest payments and the return of principal at maturity.

• Convertible bonds

Bonds that can be converted into a predetermined number of the company’s equity shares.

• Zero-coupon bonds

Bonds that do not pay interest but are sold at a discount to par value; returns come from the difference between purchase price and par value at maturity

• Treasury Inflation-Protected Securities (TIPs)

Treasury Inflation-Protected Securities that provide protection against against inflation

Coupon

• The interest payment made to bondholders, typically on an annual or semi-annual basis.

Par Value (FV) (usually 1000$)

• The face value of a bond; the amount paid back to the bondholder at maturity.

Discount

When a bond sells for less than its par value

Premium

When a bond sells for more than its par value

Bond Value Calculation

• Calculated based on the present value of future cash flows, including coupon payments and par value.

Current Yield

• Calculated as the annual coupon payment divided by the current market price of the bond.

Why is YTM important

• because it provides a comprehensive measure of a bond's overall profitability.

Yield Curve

A graphical representation of the interest rates on debts for range of maturities

Realized Yield

The return on a bond based on actual cash flows received over a period

Interest Rate Risk

The risk of bond prices failing due to increasing interest rates.

Call Provision

Allows the issuer to redeem the bond before its maturity at specified terms

Marketability

The ease with which a bond can be bought and sold in the market

Bond Ratings

A measure of the credit quality of bonds, assessing the likelihood of default

Holding Period Return

• The total return earned on an investment over a specific period; calculated as (Ending Value - Beginning Value)/Beginning Value.

Expected Return

• The weighted average of possible returns, calculated based on the probabilities of different outcomes.

Standard Deviation and Variance

Measures of the dispersion returns; standard deviation indicate volatility

Historical Market Performance

Understanding past trends to predict future performance

Benefits of Diversication

Reduces risk by allocating investments among various financial instruments or sectors

Systematic risk

The risk inherent to the entire market or entire market segment

CAPM(Capital Asset Pricing Model)

• A model used to determine the appropriate required rate of return for an asset, considering its risk compared to the market.

Beta

A measure of a stock’s volatility in relation to the market: important for assessing risk

Coefficent Variation

statistical measure of the dispersion of data points in a data series around the mean

CV Formula

CV= standard deviation/mean

S&P 500

Has a beta of 1.0

Beta Formula

Covariance// Variance

Covariance

Measure of a stocks return relative to that of the market

Variance

Measure of how the market moves relative to its mean