Term
| The more variable or wider the distribution of possible returns, whats the risk |
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Definition
| Lower the risk due to diversification |
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Term
| The most commonly used indicator of an assets risk |
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Definition
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Term
| if 2 return series move in the same direction |
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Definition
| they are positively correlated |
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Term
| theoretically risk can be reduced to 0 if 2 securities have |
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Definition
perfect negative correlation
because if one to go down the other would up but this means you make no money |
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Term
| War, inflation, interest rates and market pyschology are all examples of |
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Definition
nondiversifiable risk, market risk
You can bet against them or for them |
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Term
| in the capital asset pricing model, the ____ is a measure of nondiversifiable risk |
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Definition
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Term
| what are the ranges of beta, such as beta of 1 |
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Definition
beta of 1, would mean that it moves perfectly with the market
2 means that if the market went up 3 point it would go up by double 6
negative means that it does the opposite of the market
zero means it has no correlation with the market
positive means that it moves in the same direction as the market |
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Term
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Definition
Quanatative, cash flow, dividends etc
Beauty contest, like the company, like where its going
feeling- have a good feeling about the company |
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Term
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Definition
| Capital Asset Pricing Model |
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Term
Rj = Rf + [Bj x (Rm – Rf)]
What is Rj |
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Definition
| Rj - required return of on the asset |
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Term
Rj = Rf + [Bj x (Rm – Rf)]
What is Rf |
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Definition
Rf - Risk free rate of return, commonly measured by the return of a treasury bill
this is lowest rate of return that you can get with no risk |
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Term
Rj = Rf + [Bj x (Rm – Rf)]
what is Bj |
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Definition
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Term
Rj = Rf + [Bj x (Rm – Rf)]
what is Rm |
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Definition
| Rm- market return, return on the market portolio of assets. Risk involved |
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Term
Rj = Rf + [Bj x (Rm – Rf)]
Rm – Rf) |
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Definition
| Rm – Rf)- is consider the risk premium that one must obtain for the amount of risk they are taking |
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Term
Rj = Rf + [Bj x (Rm – Rf)]
what is Rm |
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Definition
| Rm- market return, return on the market portolio of assets. the oppertunity cost |
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Term
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Definition
| the legal doc that determines the legal rights of the bondholders and the duties of the bond issuer, such as return, callable or not, restritive convants, and so forth |
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Term
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Definition
| commitments that the bond issuers agrees it will follow during the life of the bond to ensure the safty of the bond, this in turn makes the bond safer |
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Term
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Definition
| bondholder could exchange its bonds into stocks at any time at a set amount, such as 30 shares for 1 bond |
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Term
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Definition
| money set aside by the company to buy back shares or bonds, this in turn causes the bond to be safer |
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Term
| how does risk effect interest rate |
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Definition
| lower the risk the lower the interest rate |
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Term
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Definition
| the firm can call back the bond at anytime, this in turn causes more risk in the bond since they probably will call back the loan when interest rates are very low |
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Term
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Definition
All bonds are rated by a rating firm, this determines the rates it will charge. this is done by looking at the company and its ability to repay the bond
A's are good investment rating bonds used for hedge funds and other funds
B's is non investment level and are risky but in turn pay out more |
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Term
Bond advantages over stocks, from the firms side
Advantages |
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Definition
Advantages-
lock in interest rates, know the rates
call features, gives repayment flexibility
debt is tax deductible
less dilution of earnings
less dilution of control- no voting rights
lower selling cost |
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Term
Bond advantages over stocks, from the firms side
disadvantages |
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Definition
Fixed interest rate
legal obligation to pay interest and principal
increased risk, debt/equity ratio
maturing bonds must be repaid
restrictive convents |
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Term
| Factors in determining the use of debt ** |
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Definition
Asset structure/ maturing of debt- at the moment
current and forcasted interest rates
desire to maintain control
industry comparsion
cash flow situation- can you handle payments
interest payments- tax dedutible
lender and rating agency impact
management towards debt
what are you going to do with the money |
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Term
| determing interest rate and required return |
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Definition
the rating of the bond
Maturity- how long
inflation
real rate
risk |
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Term
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Definition
| is the equil between the demand for funds and funds supplied, the us is very stable and stays around 1 this level determines real rate of interest |
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Term
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Definition
| (real rate + inflation premium) + risk premium |
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Term
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Definition
| real rate of interest + inflation premium |
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Term
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Definition
default risk- the risk of the firm defaulting
maturity risk- how long the bond is
conditional risk- callable or not, etcc |
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Term
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Definition
default risk- the risk of the firm defaulting
maturity risk- how long the bond is
conditional risk- callable or not, etcc |
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Term
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Definition
shows the return of different lengths of bonds
increase in slope- shows expected increase in inflation
upward sloping since risk goes up as time increase, unless it is a very high time of interest and expected interest rates will go down |
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Term
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Definition
difference in the nominal rates and the default rate of junk bonds
so if treasury bond is 10 and junk is 15, the spread is 5
in good times this spread is low, since people think all companies will be able to repay
in bad time, this is high since there is a higher chance they wont be able to
bond buyers tend to look out, so this spread is a good indicator what the future economy is going. |
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Term
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Definition
junk bonds-
zero coupon bonds
secure bonds
unsecured bonds |
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Term
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Definition
| bonds that are rated in the b's |
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Term
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Definition
bonds that have no interest rate, they are sold at a discount.
ad
you dont have payments. good if cash flow is hard
dis
ballon payment at the end
only raise half the capital |
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Term
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Definition
| bonds that are secured by an asset, for firms that are deemed high risk |
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Term
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Definition
| most big respectable companies use this because they dont need to secure it due to its low risk |
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Term
| stock compared to debt/bond from the investor side |
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Definition
-voice in managment
-last in line for debt
can make the biggest gains as well as the biggest loss
-maturity, there is no maturity firms can buy back |
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Term
| common stock advantages from the firms side |
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Definition
-no fixed charges
-no maturity
-increase credit standin/ borrowing power
-reduce cost of late debt |
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Term
| common stock advantages from the firms side |
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Definition
-no fixed charges
-no maturity
-increase credit standin/ borrowing power
-reduce cost of late debt |
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Term
| common stock disadvantages from the firms side |
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Definition
-high cost of underwriting
-dividends are not tax deductible
-dilution of earnings, ownership and control
key part |
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Term
| common stock disadvantages from the firms side |
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Definition
-high cost of underwriting
-dividends are not tax deductible
-dilution of earnings, ownership and control
key part |
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Term
advising role of the investment bank
what does the investment bank do |
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Definition
-choosing of financing vehicle
-when and how much
- prepares the prospectus, to gain SEC approval
this describes everything about the company
-full disclosure and jury proof
so that they can not be sued if investor doesnt like something after the sale
-set the offering price |
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Term
| problem with the IPO and the investment bank with the firm |
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Definition
| investment bank wants a lower offering price because they will make money on the spread of the IPO and the first day of trading, while the firm wants the most capital possible |
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Term
| 6 different valuation models for stock |
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Definition
zero growth
variable growth
book value
constant value
free cash flow
price/ earnings multiples |
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Term
| 6 different valuation models for stock |
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Definition
zero growth
variable growth
book value
constant value
free cash flow
price/ earnings multiples |
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Term
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Definition
| the idea that the stock market moves very fast therefore there is only a small window for there to be an undervalued stock |
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Term
| price of stocks are determine largely by |
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Definition
EPS
cash flow
and sometimes dividends |
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Term
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Definition
| the idea that the stock will pay dividends of the same price forever |
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Term
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Definition
cash flow (maybe EPS) / discount rate - growth rate = price
no companies growth at the same rate, some big cap firms do |
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Term
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Definition
requries you to have different growth rates for each year
best way to do it but it is impossible to know |
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Term
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Definition
| uses the varaible growth model for the short term then use constant for the long term and add them together |
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Term
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Definition
| is the same thing as discount of capital, cost of raising money |
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Term
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Definition
| is the cost of capital, cost to get something, interest, min return one must get |
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Term
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Definition
earnings x PE
if the company is thought to grow the higher the PE |
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Term
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Definition
is the present value of its future worth
the problem is knowing the future worth |
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