FIN: Bonds, stock

bond

LT instrument in which borrower agrees to make payments of principal and interest on a specific date, to holders of the bond

maturity

when the future lump sum of CF occurs

par value

future lump sum CF amount

coupon rate

standard interest rate in bond indenture, annual rate of interest to determine annual coupon payment (par x CR)

YTM

rate of return earned on bond held until maturity

nominal yield

stated interest rate based on par/face, measures how much interest the bond pays each year

current yield

the rate the lender/investor receives if they hold the bond for 1 year

annual coupon pmt / price of bond

call features

allow the issuing company to force a refund to the investor (and to avoid paying high coupons) (people can get bonds back sooner)

benefits the issuers, lets company pay back lender/investor sooner

put features

allows the investor to demand a refund form issuer (and avoid receiving low coupons)

benefits the investor, lets lender/investor demand the principal back form company early

conversion features

allows investor to trade in bond for some stick

benefits both parties

lets lender/investor convert bond into stock certificates

stock certificate

identifies that someone is partial owner of the company and shows how many shared that person has, physical documents

rights to stockholders

• right to residual profits

• right to vote on BOD

• right tot maintain ownership percentage

• right to inspect public records (extra)

Corporate governance structure

shareholders → BOD → C-suite: CEO CFO COO

how to value stock

• forecast future CF (dividends)

• discount those future CF’s back to present

• called dividend discount model

PV of perpetuity

D/R

dividends/ rate

PV of growing perpetuity

D1/(r-g)

D1= D0(1+g)

preferred stock

paid after debt holders and before common shareholders

more risk that debt holder and less risk than common shareholders

common stock

any price, no stated dividend rate, share profits

more risk and high potential return than all other investors

holding period return (HPR)

=(new - old + benefits)/old

= change in investment/ OG investment

hierarchy of payments

1. general creditors

2. debt holders

3. preferred stock

4. common stock

dividend discount model (DDM)

find price per share by discounting future dividend to present time

value of company

= PV of future CF = Book value of equity

share price

= company valuation / shares outstanding

finding future profit valuation

1. find next profit

   1. NI1=NI0 * (1+g)

2. find PV of future profits

   1. NI1/(r-g)

capital asset pricing model

(ri - rf) = B(rm - rf)

rf

risk free

ri

firm ‘i’ return

rm

mkt return

(ri - rf)

firm risk premium

(rm - rf)

mkt risk premium