FIL 240 Lecture14Outline of Last Lecture I. Constant Growth Perpetuitya. Present Value Equationb. D1 Equationc. Example 1d. Example 2II. Annuitya. Exampleb. RuleIII. Yield on Bondsa. Rule 1b. Rule 2c. Call-able Bondsd. Yield to CallIV. Liquidity & Money Supplya. M0b. M1c. M2d. M3Outline of Current Lecture I. Need to Know for Exama. Bond, Note, Billb. Debtc. Face Valued. Risk Premiume. Betasf. Other Risk Measuresg. Finance vs. Accountingh. Federal Reservei. FOMCj. Monetary Policyk. ROE & ROA relationshipl. Market cap, beta, common stock vs. preferred, call-able bonds vs. non-call-ableII. Parts of ExamIII. Part II of ExamThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. Percent Change of Ratiosb. Bond Quotec. Riskd. Quote or Price Bonde. Yield to Maturityf. CD volatilityg. CAPMh. Payment on Loani. Effective yieldIV. Part IIIV. Possible Short AnswersVI. Practice ProblemsCurrent LectureReviewInformation sheet will be posted online by professor at 7pm – crucial to exam!!98.25 – $982.5 bond – interest is $17.50 – get $100 FV, (17.5/982.5)*100 =1.78 t-bill yieldI. Need to Know:a. Difference between bond, note, billb. Debt: issuer, buyer, purchaserc. Face value of bond is $1000d. Risk premium – parts of risk premium, what is not risk premiumi. Maturity, default, & illiquidity – t-bill has no risk premium, gov. bond doese. Betas – what it represents, pivot pointsi. Measures non-diversifiable risk relative to the market portfoliof. Other measures of risk:i. Business risk, total measure, contribution of operating leverage, contribution of financial leverageg. Difference between finance and accountingh. Federal Reserve – structure, number of district banksi. Federal Open Market Committee – structure, number of membersj. Monetary Policyi. Demand for bonds changes the structure of tier 1 – money supply increases, bond supply decreasesii. Contractionary monetary policyk. ROE & ROA relationahip i. ROE can be negative, doesn’t mean the company is deadii. Times interest earned below 1 means the company is deadl. Maket cap, beta, common stock vs. preferred, call-able bond vs. non-call-ablem. If a term was not brought up in class, it won’t be on the exam.II. Parts of Exama. 3 parts:i. Multiple choice – 20 questionsii. Math problems, PV & Annuity, T-bill yieldiii. Short answeriv. 86 new terms on the examv. Quizzes are good prep for exam – especially quiz 4vi. Multiple choice questions will be the most difficultIII. Part 2 of Exama. Percent change of ratios – round no more than 4 decimal places during problem. Answer must be 2 decimal places – MUST GIVE UNIT OF MEASURE - $, %, etc.b. GIVE bond quote if it asks, not bond price. c. Risk:i. Sales risk, contribution of financial leverage, contribution of operating leveraged. Quote or price a bonde. Yield to maturity – assume semi-annual coupon payments, remember to multiplyI% by 2!!f. CD volatilityg. Find current price of Cosco common stocki. CAPMh. Payment on loan & effective ratei. Effective yieldIV. Part IIIa. 5 essays – write 4b. Answers with only one sentence each – to the point. V. Possible Short Answer Questions:a. What is liquidity?b. What does it mean that shareholders have residual claim to the cash flows of a corporation?c. What is beta?d. What is diversifiable risk?e. What is money?f. What are the 3 types of money?g. What are the Fed’s 3 tools of monetary policy?h. What are the 3 functions of the Fed?i. What is financial intermediation? – NO financial institutions!j. What is opportunity cost?k. Why is accounting profit not useful in financial analysis in and of itself?l. What are 3 measures financial analysts would use for risk?i. Beta, Standard Deviation, CV, & Interest RatesVI. Practice Problems:a. What is the effective yield on a loan with quarterly payments & an APR of 7.45%?i. ((1+(0.0745/4))4 – 1)*100 = 7.66%b. Bond Price or Quotei. KNC 4.85% 20291. 15 years to maturity – 30 semiannual payments2. Apps – Finance – TVM Solver3. Yield is 5.04% - Find Quote4. I%=5.04/25. PMT=$48.50/26. FV=$10007. PMT: END8. PV=980.179. Quote=98.02c. Yield to Maturityi. If bond quote is at 104.28, find YTMii. PV = -1042.80iii. I% = 2.28*2 =
View Full Document
Unlocking...