what are bonds?
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•The bond indenture is a legally binding agreement that defines the terms.
•Bonds are contractual agreements where the issuer agrees to repay the
principal borrowed plus interest.
•Bond holders have no ownership or voting rights
•Bonds have a maturity date -
•Debt has a date at which the principal is repaid to the lender or owner of
the debt.
one period stock valuation model
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, PV0 = (P1 + D1) / (1+r)
same as PV = FV / (1+r) because the FV is the price at a point in time plus the
dividend
determinants of credit ratings
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•Rating firms do not disclose formula but includes:
1. Current financials, especially coverage and debt ratios
2. Project financials and future funding needs
3. Pending litigation
4. Pending antitrust or environmental issues
•"Black box" process - they do study the company very closely
•Of course, when ratings change, bond prices react.
cash flows for bonds are...
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annuities (regular coupon payments) + a fixed payment at maturity (the
principal)
preferred stock valuation
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, •Most preferred stock acts like a perpetuity where the investor receives
fixed dividends forever.
•Infinite model, zero growth
coupons
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coupon rate is the interest you get paid each period
•Coupon payment = Coupon rate * Face Value
this is the PMT portion of the TVM part of bond valuation
weakness of the finite model
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1. Predicting future dividends
2. Predicting a future selling price
3. Estimating the discount rate
*Don't really know what the price is, that's what makes the market fun
*Hoping you are predicting the price better than the person next to you
interest rate risk
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Give this one a try later!
•The bond indenture is a legally binding agreement that defines the terms.
•Bonds are contractual agreements where the issuer agrees to repay the
principal borrowed plus interest.
•Bond holders have no ownership or voting rights
•Bonds have a maturity date -
•Debt has a date at which the principal is repaid to the lender or owner of
the debt.
one period stock valuation model
Give this one a try later!
, PV0 = (P1 + D1) / (1+r)
same as PV = FV / (1+r) because the FV is the price at a point in time plus the
dividend
determinants of credit ratings
Give this one a try later!
•Rating firms do not disclose formula but includes:
1. Current financials, especially coverage and debt ratios
2. Project financials and future funding needs
3. Pending litigation
4. Pending antitrust or environmental issues
•"Black box" process - they do study the company very closely
•Of course, when ratings change, bond prices react.
cash flows for bonds are...
Give this one a try later!
annuities (regular coupon payments) + a fixed payment at maturity (the
principal)
preferred stock valuation
Give this one a try later!
, •Most preferred stock acts like a perpetuity where the investor receives
fixed dividends forever.
•Infinite model, zero growth
coupons
Give this one a try later!
coupon rate is the interest you get paid each period
•Coupon payment = Coupon rate * Face Value
this is the PMT portion of the TVM part of bond valuation
weakness of the finite model
Give this one a try later!
1. Predicting future dividends
2. Predicting a future selling price
3. Estimating the discount rate
*Don't really know what the price is, that's what makes the market fun
*Hoping you are predicting the price better than the person next to you
interest rate risk
Give this one a try later!
