Finance
Jehlifisch Universität, Herbstsemester 2013
Jehlifisch Universität, Herbstsemester 2013
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Lernkarten
Discounting is an operation in order to determine the present value of a future payment.
Value additivity means that a bundle of goods in a market has the same total price as the sum of the single components of this bundle.
A perfect market is free of arbitrage.
The difference between the net present value (NPV) and the present value (PV) is that you use the nominal return in order to calculate NPV whereas you use the real return in order to calculate to PV.
Markets which are free of arbitrage allow making a profit without taking any financial risk.
The internal rate of return is a discount rate at which the present value of an investment is zero.
The rate of return, discount rate, hurdle rate, and opportunity cost of capital all have the same meaning.
A dollar today is worth more than a dollar tomorrow if the interest rate is positive.
One can find the present value of a future cash flow by dividing it by an appropriate discount factor.
The opportunity cost of capital is higher for safe investments than for risky ones.
"Accept investments that have positive net present values" is called the net present value rule.
The present value of a growing perpetuity, with cash flow C1 occurring one year from now, is given by: [C1/(r - g)], where r > g.
An equal-payment home mortgage is an example of an annuity.
In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases
steadily.
The calculation of compound interest assumes reinvestment of interest payments at the given rate of return.
The yield to maturity on a bond is really its internal rate of return.
In the U.S., most bonds make coupon payments annually.
The duration of any bond is the same as its maturity.
The duration of a zero-coupon bond is the same as its maturity.
The longer a bond's duration, the greater its volatility
The term structure of interest rate determines the relationship between yield to maturity and maturity
If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.
Short-term and long-term interest rates always move in parallel.
The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.
(1 + rnominal) = (1 + rreal)*(1 + inflation rate)
The U.S. Treasury issues inflation-indexed bonds known as TIPs.
Long-term spot rates are usually higher than short-term spot rates.
Once a bond defaults, bondholders can no longer receive any residual payment from the bond.
Corporate bond yields are generally higher than government bond yields for bonds having the same coupon rate and maturity.
The spread of junk bond yields, over that of U.S. Treasuries, is generally lower than the spread of investment-grade bonds.
Consider the impact of inflation risk on the term structure of interest rates. If investors become more wary of inflation, one would expect to observe a steeper, more upwards sloping, term structure of interest rates.
Real rates of interest tend to fluctuate more wildly than nominal rates of interest.
Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The bond with a lower coupon rate will have a longer duration.
The return that is expected by investors from a common stock is also called its market capitalization rate, or cost of equity capital.
Most of the trading on the NYSE is in ordinary common stocks.
The only payoff to the issuer of common stocks is in the form of cash dividends.
The constant growth formula for stock valuation does not work for a firm with a negative growth rate (i.e., a declining growth rate) in its dividend.
The ROE equals the fraction of earnings per share to book equity per share.
It is not possible to value a firm that has a supernormal (variable) growth rate for the first few years of its life.
A large percentage of the total value of a growth stock comes from the present value of its growth opportunities.
