Bond Valuation

Finance Final Exam

Terms in this set (...)

cash flows
The value of any asset is based on the present value of the________ _______ the asset is expected to produce in the future.
Corporations raise capital in two forms: ________ and ________
call provision
Most bonds have a ______ __________ that allows the issuer to pay off an d retire a bond under specific terms.
new issue; seasoned issued
An ________ ________ is the term applied to a bond that has been issued, whereas if the bond has been on the market for a while it is classified as outstanding bond, or an seasoned issued.
present value
A bond with annual coupon payment represents an annuity of INT dollars per year for N years, plus a lump sum of M dollars at the end of N years, and its value, Vd, is the ________ ________ of this payment stream.
market price; par value
At the time a bond is issued, the coupon interest rate is generally set at a level that will cause the ________ _______ and the ______ ______ of the bond to be approximately equal.
Market interest rates and bond prices move in ________ directions from one another.
yield to maturity
the average rate of return earned by purchasing a bond and holding it until maturity is known as the bonds's ________ ___ ________
When the market rate of interest is above the coupon rate, the bond will sell at an _______.
If current interest rates are below the coupon rate, the bond will sell at an _________.
current yield
The _______ _________ is the annual interest payment on a bond divided by its current market value.
return;current;capital gains
If a bond sells at par, its ______ consists entirely of a ______ yield and has no ______ ______ yield.
coupon payment; interest rate; years
To adjust the bond valuation formula for semiannual coupon payments, the _______ _______ and ________ ______ must be divided by 2, and the number of ______ must be multiplied by 2.
preferred; common
_______ stockholders generally are paid the same dividend each year, while the dividends paid to _______ stockholders can vary and are often dependent on current and previous earnings levels and the future growth plans of the firm.
Like other assets, the value of common stock is the ______ value of the expected future cash flow stream.
dividend;capital gains
For all stocks, the expected rate of return is composed of an expected _______ yield and an expected _______ ______ yield.
If the future growth rate of dividends is expected to be ______, the rate of return is simply the dividend yield.
earnings per share
Growth in dividends occurs primarily as a result of growth in ______ ___ _______.
interest rate price risk
Interest rates fluctuate over time, and people or firms who invest in bonds are exposed to risk of changes in bond prices from changing interest rates, or ________ _____ ______ ______.
interest rate reinvestment risk
The shorter the maturity of the bond, the greater the exposure to _________ ______ ___________ ______, the risk that income from a bond portfolio will vary because cash flows have to be reinvested at current market rates.
required rate of return
The ________ ______ ___ ______ is the minimum rate of return on a common stock that stockholders consider acceptable.
realized rate of return
The _________ ______ _____ ________ is the rate of return on a common stock actually received by stockholders.
The _______ value of an asset that in the mind of a particular investor is justified by the facts it may be different from the asset's current market price, its book value, or both.
______ growth is the growth that is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole.
since a zero growth stock is expected to pay a constant dividend, it is a ________.
________ growth is the part of the firm's life cycle in which growth either is much faster or is much slower than that of the economy as a whole.
sell; decline
If the expected rate of return is less than the required rate, investors will _______ the stock; there will also be a tendency for the price to ___________.
_________ will generally exist for a given stock because security prices adjust rapidly to new developments.
marginal investor
It is the _________ _______ who establishes a stock's market price.
efficient market hypothesis
The ________ _________ _________ states that stocks are always in equilibrium and that it is impossible for an investor to consistently beat the market.
semistrong firm
The ________ _______ of EMH states that current prices reflect all publicly available information.