Fin 330 study guide

1. What is the value of any asset? - Definition: The value of any asset is the present value of its future cash flows discounted at the appropriate rate of interest. A legal agreement between the firm issuing the bonds and the bond trustee - indenture A process of in the public financial market in which the investment banker assumes risk of selling a security issued - underwriting A provision in a bond in which bond holder can exchange their bonds into a set number of common stocks - conversion A provision that provides the issuer of the bond with the right to redeem or retire a bond before it matures - call a system used by designated agencies to assess the default risk of a bond issue - rating a type of debt in which the borrower puts up a collateral - secured An unsecure debt instrument - debenture Bond that doesnt pay coupon interest, the bond is selling below par value, .......- coupon bond - zero Called a high risk bond, it bond rating is below investment grade - junk Distinguish between an ordinary annuity and an annuity due - An ordinary annuity has payments occurring at the end of each period while annuities have payments occurring at the beginning of each period. An annuity due will be always be higher than ordinary annuity. Explain the relationship between bond value and the bond's yield to maturity. - The YTM is the discount rate used to determine a bond's value. As YTM goes up, bond prices will go down. If YTM goes down, bond prices will go up. How do semiannual interest payments affect the asset valuation equation? - You must make adjustments to N and I. If m is the the number of periods per year, then multiply N by m and divide I by m. With bonds, you have to also divide the payment by m. How do you calculate the value of a bond? - The value of any asset is the present value of its future cash flows discounted at the appropriate rate of interest. The future cash flows of a bond are a payment of interest computed by multiplying the bond's coupon rate times pare and the par value of the bond. The appropriate discount rate is the yieldto-maturity or market required rate of return.