FIN 300 Study Guide - Final Guide: Externality, Preferred Stock, Risk-Free Interest Rate
Ch: 5: Effective Annual Rate (EAR) – compounded once a year. Annual Percentage Rate (APR) – compounded once per payment period.
Ch: 6 Bond: CPN: Coupon Payment; y: yield to maturity; FV: Face Value; n: # of
payments; r: rate
Ch: 7 Valuing Stocks: ; g: growth rate; EPS: Earnings per share
Financial Leverage Ratios
Premium: Coupon Bond > Face Value
Coupon % > Yield %
Par: Price at which coupon bond trade = face value
Discount: Less than face value
Coupon % < Yield %
Bond price < FV
Zero-coupon
Bond Characteristics
Effect on interest rate
Higher term to
maturity
Bond price Decrease
Increase
Higher coupon
Payment
Decrease
Liquidity Ratio
Asset Efficiency Ratio
Capital Intensity Ratio is 1/TAT.
C=Pays Beginning of each period
M=# of compounding periods/year
Long term bonds = Riskier
Ex. Before First coupon payment = n-1
Bond Quotations: Canada 9.75 Jun 1/21 167.09 1.91
Means: Govt. Canada Bond, coupon=9.75%, maturity=June 1,2021, price= $1670.90, YTM=1.91% in APR
Investment grade Bonds=Bonds in top 4 categories of creditworthiness, low risk of default AAA,AA,A,BBB
Speculative bonds (junk bonds/high yield)=bonds in bottom 5 categories of credit worthiness BB,B,CCC,CC,C,D
Credit spread increase as bond rating fall, b/c
lower-rated bonds = riskier
Profitability Ratios
Valuation Ratios
Preferred Stock: Stock with preference/common
shares in payment of dividends & liquidation.
Growth rate=0
Cumulative Preffered Stock: preferred stock
which all missed preffered dividends must be
paid before any common dividends may be paid
Non-cumulative preferred stock: preffered stock
for which missed preferred dividends do not
accumulate. Only current dividen
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