energy finance 🤑🤑

covenant

specifies terms of bond

maturity date

date of final payment to bond holder

term

time remaining until final payment

face value

aka par value or principal amount

amount used to compute interest payments (ex. $1,000)

typically repaid at maturity

coupons

periodic interest payments to holder of bond

coupon rate

set by the issuer and stated on the bond certificate

expressed as an APR

zero-coupon bond

most basic type of bond

only two cash flows: market price at time of purchase and face value at maturity

yield to maturity (YTM)

rate of return for buying the bond, assuming it is held to maturity

coupon bond

pays face value at maturity

also make regular coupon interest payments

return from two sources:

• difference between purchase price and principal value

• periodic coupon payments

treasury note

U.S. treasury coupon bond, original maturity 1-10 yrs

treasury bond

U.S. treasury coupon bond, original maturity 10+ yrs

decreases

as yield to maturity increases, price _____

increases

as coupon rate increases, price _____

par

coupon rate is chosen so the bonds will trade close to _____

par bond

coupon rate is equal to yield

price equals face value

discount bond

coupon rate is less than yield

price is less than face value

includes all zero-coupon bonds

premium bond

coupon rate is greater than yield

price is greater than face value

converge

bond prices must _____ to par at maturity

duration

measures the sensitivity of a bond’s price to interest rate changes

less

bonds with higher coupon rates are _____ sensitive to interest rate changes because they pay higher cash flows up front

risk-free

U.S. treasury securities are generally regarded to be _____

less

investors pay _____ for bonds with credit risk

higher

the yield for bonds with credit risk will be _____

default risk

risk that a borrower may not make payments as promised. lenders are paid a premium for purchasing these bonds

cost of debt

• 
  

credit spread

difference between the yields of corporate bonds and treasuries

common stock

basic ownership claim in corporation

right to vote

right to firm’s residual assets

cost of equity

• dividend model

• enterprise value

• free cash flows

• comparable firms

no dividends

rapidly-growing firms typically pay _____ on common stock during the growth phase

ways to increase dividends

• increase earnings

• increase dividend payout rate

• decrease number of shares

enterprise value

the sum of the present value of existing projects and the NPV of future projects

P/E ratio

most common valuation multiple

ratio of firm’s value to some measure of the firm’s scale or cash flow

high

firms with high growth rates and high payout rates will have _____ P/E ratios

WACC

opportunity cost of capital

discount rate that should be used to discount the firm’s expected free cash flows to estimate firm value

market price

used to estimate WACC weight for common stock

book value

used to estimate WACC weight for debt

cost of debt

YTM on publicly-traded bonds or risk-free rate plus default spread given debt rating

after tax

cost of equity

CAPM methods or dividend approach

systematic risk

non-diversifiable

represented by beta of equity

stocks that are sensitive to these sources have high rates of return

beta of assets

if there is no debt, the beta of equity is equal to the _____

0

if debt is riskless, beta of debt =

perfectly correlated

when D/E ratio is constant, tax shield is _____ with firm value

uncorrelated

when debt level D is constant, tax shield is _____ with firm value

3 yrs

typically at least _____ is used to measure beta of equity

5%

common equity risk premium in practice

fama-french

estimates cost of equity using multifactor risk models that capture the risk of investments with multiple betas

debt-to-value ratio

the fraction of the firm’s total value that corresponds to debt

D/(D+E)