Par Value (Face Value)
return of principle at maturity, assume par value of 1,000
Coupon (Interest) Rate
Stated interest rate and will multiply by the par value to get the dollar amount for the payment
Maturity Date
when the investor receives the par value or pay out form the issuer of the bond
Call Provision
Allows the issuer of the bond to repay the bond prior to maturity
Sinking Fund
Require issuer to retire a portion of the issue each year
Yield to Maturity
The best measure of total return on a bond, the return that you get from interest or capital gains
Value of a Financial Asset
present value of future cash flows
Value of a Bond
Present value of future cash flows, interest + par value
If Coupon Rate = Yield to Maturity
Price = par
If Coupon Rate < Yield to Maturity
price < par
If Coupon Rate > Yield to Maturity
Price > par
Treasury Bills
Maturity less than one year they are pure discount bonds, no payment
Treasury Notes
Maturity between 1-10 years, coupon bonds
Treasury Bonds
Maturity greater than 10, coupon bonds
Agency Bonds
Issued by government agency not backed by full faith and credit of the US government
Municipal Bonds
Issued by state and local governments major benefit "No Taxes", Triple tax exempt you don't pay interest on the bond, you don't pay state income tax as long as yo live in the state, avoid local taxes
Inflation-protected Bonds
Treasury Inflation Protected Securities a fixed rate of interest but if inflation rises it becomes a flexible rate
Coupon Bonds
issued by corporations
Foreign Bonds
Issued by the dang Japs
Zero Coupon Rate
no payment
Interest Rate Risk
There's an inverse relationship between changes of interest rates and price of bonds, as interest rates go up the price of bonds goes down
Price Risk
Relates to the market value, higher for long maturities, higher for low coupon rate
Reinvestment Risk
Relates to income its higher for short maturities, higher for high coupon, once my bond matures can I reinvest it to get the same level of interest
Registered vs. Bearer
Registered in street name through a brokerage account, bearer is registered in physical certificate
Secured vs. Unsecured (Debenture)
Secured something to back it up like a mortgage backed by an asset like your house, Unsecured bond not backed by collateral which means higher coupon which means more risk
Preferred (Perpetuity) Stocks
Dividends are paid out first before common stock, can be skipped but must be made up, NO GROWTH, but the have NO VOTING RIGHTS
Common Stock
Paid after preferred stocks, do have voting rights, like voting for board of directors, which could issue additional shares
Classes of Stock
multiple classes of control like one share may be worth one vote while another share may be worth hundred votes
Preemptive Rights
allows existing shareholders to purchase additional shares before the initial offering
Value of a financial Asset
the present value of future cash flows
Value of a Stock
the present value of dividends + capital gains
Market Value
determined by supply and demand
Intrinsic Value
What I think it should be worth
Risk Trade-Off
the greater the expected return the greater the risk
From greatest to least in terms of risk
Small Stocks, large stocks, long term corp bonds, long term gov bonds, Treasury Bills
Measuring Risk
a chance that some unfavorable event will occur
Total Risk
Systematic Risk + Unsystematic Risk
Unsystematic Risk
firm specific risk, particular to a given firm, like apple and a phone having a defect causing a recall, diversifiable
Systematic Risk
market risk- things that affect the system or the economy as a whole, legislation, change in interest rates, non-diversifiable
Standard Deviation vs. Beta
Standard Deviation is total risk, while Beta measures the correlation between the stocks and the market like systematic risk
Diversify to reduce __________ risk (which also reduces ______ risk
Unsystematic and Total
Perfect Positive Correlation
same direction and same magnitude
Perfect Negative Correlation
Different direction and same magnitude
Uncorrelated or no correlation
close to zero
Bond market is
far bigger than the stock market