Day 3

What is the formula for Bond Yield?

Coupon payment / the bond's original price.

What does the Nonconstant Growth Valuation Method find?

It finds the value of stock under the belief its value will change every year.

What is an Amortizing Loan?

A loan where you make monthly payments that cover both principal and interest.

How is Compound Interest calculated?

Principal (1 + interest rate / number of times interest compounds) ^ (number of times interest compounds x number of years).

What is the formula for Present Value?

Future value required / ((1 + periodic rate of return) ^ number of periods).

What does Future Value represent?

How much an investment today will be worth at some point in the future.

What is Compound Interest?

Interest calculated at set intervals, involving accrued interest and principal.

What is the formula for Future Value?

Present value * (1 + interest rate)^number of time periods.

How is the coupon for a Floating-Rate Bond calculated?

By taking the bond's fixed margin and adding its index.

What is the Real Interest Rate?

A rate of interest that has been adjusted for inflation, calculated with the Fisher equation.

How do interest rates vary for Bond Yield?

Short-term bonds usually have low rates, while long-term bonds have higher rates.

What is the formula for Present Value of a Perpetuity?

Dividend / discount rate.

What type of loan is characterized by making initial payments for interest only?

Interest-Only Loan.

What is a Zero-Coupon Bond?

A bond that pays no interest but can be redeemed for face value at maturity.

What does Bond Yield represent?

The amount of money an investor receives from their investment; lower market price usually means higher yield.

What is Present Value?

The amount of today's money that will equal future payments when invested at an interest rate.

What characterizes a Floating-Rate Bond?

Its coupon is variable and based on an external index plus a fixed margin rate.

What is a Perpetuity?

Payments that have no maturity or expiration date.

What is Inflation?

A process causing prices to rise over time while money value decreases.

How is Real Interest Rate calculated?

Nominal interest rate - expected rate of inflation.

What is the formula for Zero-Growth Valuation Method?

Dividend for an individual share of stock / rate of return.

What type of loan is sold at a discount with a set maturity date?

Pure Discount Loan.

What does the Efficient Market Hypothesis (EMH) state?

Market prices reflect all available information, preventing investors from gaining a competitive edge.

What are the forms of the Efficient Market Hypothesis (EMH)?

Weak-form, Semi-strong, Strong-form.

What is the formula for Dollar Return?

Sale price - purchase price + dividends.

How do you calculate Geometric Average/Mean?

{(a x b x c x d x e) ^1/n} - 1.

What does Dollar Return show?

The actual currency received from an investment, not directly correlated to percentage return.

How are investment returns distributed in a Normal Distribution?

They take the shape of a bell curve.

What is the formula for Arithmetic Average/Mean?

Sum of numbers divided by the quantity of numbers.

What does the Empirical Rule / 68-95-99.7 Rule indicate?

The percentage of data within standard deviations from the mean.

What indicates the Rate of Return?

The money obtained after initial investment costs, shown as a percentage.

What is the formula for Rate of Return?

((Current value - original value) / original value) x 100.

What does the Empirical Rule state about standard deviations?

68% within one, 95% within two, 99.7% within three standard deviations of the mean.

What does Rate of Return represent?

The price paid to initially acquire an investment.

What is the Current Value of an Investment?

How much the investment is worth now.

What is Standard Deviation used for?

To measure data's variability or spread in normal distribution.

What is the formula for Percentage Return?

(Sales price - purchase price + dividends) / purchase price.

What is the effect of Efficient Market Hypothesis (EMH) on Competitive Advantage?

Markets reflect all information, limiting investor benefits.

What is a Geometric Average/Mean?

An average that considers past performance of an investment.

What are the benefits of Stock Options to Employees?

They provide pay incentives while reducing costs for businesses.

What is a Call Option?

An investment allowing purchase of stock shares at certain prices.

What is a Stock Option: Put?

A contract allowing the chance to sell stocks at a predetermined price.

What is a Stock Option?

An arrangement allowing employees to purchase company stocks at a set price.

What are Derivatives?

Financial instruments whose value is based on another financial instrument.

What is a Stock Option: Call?

A contract giving the right to purchase options at a preset price.

What does Stocks: Dilution refer to?

A process that reduces the value of existing stocks when new ones are created.

What is a Maturity Date?

The date a purchasing offer for call options or warrants expires.

What is a Warrant?

An offer to investors including purchase price, premium, and expiration date.

What are the advantages of Bonds for businesses?

Retain voting rights and delay repayment.

What does the Securities and Exchange Commission (SEC) do?

Oversees financial health of companies to build investor confidence.

What is the Accounting Rate of Return?

A means of estimating profit from an investment.

What does Payback Analysis do?

Calculates how long it takes for an investment to pay off.

What is Capital?

Another term for money, which can be raised through stocks or bonds.

What is the Modified Accelerated Cost Recovery System (MACRS)?

A system detailing asset depreciation over time.

How is the Accounting Rate of Return calculated?

Average profit / average investment x 100.

What is a Stock?

Shares of ownership in a company, divided into common and preferred types.

What does investing Beta indicate?

The risk of an investment relative to a benchmark.

What is the role of the Securities and Exchange Commission (SEC) in stock offerings?

Requires companies to register before public stock offers.

What are the advantages of Stocks for companies?

They often don't require dividend payments.

What is Systematic Risk?

The inherent market risk affecting the entire stock market.

What is Stocks: Marketing?

A process to increase bond sales, requiring expenditure.

What does Preferred Stock guarantee?

Earns dividends and provides a percentage of ownership without voting rights.

What is the Cost of Capital?

The loss incurred by not investing capital elsewhere.

How is the Payback Analysis calculated?

Initial investment / annual net cash flow = payback period.

What is the difference between Common Stock and Preferred Stock?

Common stock grants voting rights without guaranteed dividends; preferred stock guarantees dividends with no voting rights.