Duration
Compares the impact of interest rate changes on a bond. How many percentage points the price of a bond will go up/down if interest rates go
... [Show More] down/up. Multiply decimal interest x percentage.
Inverse Price Relationship
When interest rates drop, bond rates go up. When interest rates rise, bond rates go down.
Sensitivity
How sensitive a bond is to fluctuating interest rates (calculated with duration)
Debenture
Bond that has no collateral
Par Value
Face value of a bond (usually 1k)
Coupon Rate
Interest rate of the bond, payable in installments. Cannot be changed for the life of the bond.
Yield to Maturity
rate of return on a bond
Affirmative covenants
things firm promises to do
negative covenants
things firm promises to not do
current yield of a bond
coupon payment divided by bond amount. NOT the same as YTM.
Subordinated debenture
debentures that take last place in a payoff
Zeros
bonds that pay no coupon, but sell at a lower price.
Eurobond
Pays out in a non-domestic currency (US bond in europe that pays in dollars)
Foreign Bond
Bond floated by another country but that is payable in the domestic currency (chinese debt payable in dollars floated in the us)
Muni-bonds
floated by local govts to fund infrastructure, exempt from taxes.
Convertible bonds
can be converted into equity securities.
Junk Bonds
bond that is rated BB or below. higher yield and higher risk.
Primary Factors influencing bond sensitivity
Coupon rate, time to maturity (primary factor).
Primary financial instruments
stocks and bonds
Syndicate
Group that is formed to handle a stock or bond issue. Made up of large investment banks or investors. They may also underwrite.
Competitive Sale
underwriters will submit bids, firm will select lowest interest rate, highest price.
Negotiated sale
Firm will investigate underwriter bids and will negotiate after more investigation.
Secondary Markets
Where stocks are traded after IPO. "the stock market"
Auction financial Market
Has a physical location. NYSE. Uses specialists.
Dealer (stock) market
does not require a physical location. Uses a network of dealers. NASDAQ.
Specialist
provides liquidity in the stock market (NYSE) and sets the spread.
ASK Price
Minimum price sellers are willing to sell for
BID price
the maximum price buyers are willing to 'bid'/Pay
Market Order
executes at the market price
Limit Order
executes at the price requested, if available.
Calculating a simple stock dollar return
Price (new) - Price (old) + div or coupon
Calculating a simple stock percentage return
{Price (new) - Price old +DIV}/ Price old+ X 100
Agency Costs
Costs that are incurred when management does not act in the best interest of shareholders.
Indirect method starts with...
Net income! [Show Less]