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FIN Test 2 Notes

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Louisiana State University
FIN 3715

Chapter 7thlate 18 century end of Revolutionary Wareconomy mostly farms selfsufficient or relied on exchanges not involving money1800sPressures for increased money supply and borrowingmillions of immigrantssteady westward flow of population into areas of agriculture and community opportunityrise in population cultivated acreage industry and living conditionsEarly Banking Sources of money and loansPrior to 1830s central bankingafterfree banking and lot of instability and bank failures1913Federal Reserve ActCountry Banks made loans to farmers on mortgage or personal securityNew England credit to manufacturing textiles bootsshoesmachineryBanks also financed commerce and shippingRailroads were the first big business in the US post Civil Warth20 CenturyFrontiers more scientific and technical rather than geographicUse of steel electricitythstarted movement west in the 20 centurytodays problems a lot like 1980sNONFinancial CorpBanks Bank of America Citigroup and othersInsurance Companies Prudential ProgressiveChpt 7 primarily public issues of corporate debtASSETS v DEBTEQUITYCorporate Bond Valuation TodayCorps largesmallborrow from various sources publicinstitutionalbanksbanksShortterm LoansLongterm Loansvarious termsconditionsLarge Corporate borrow from publicExample of Xanth Co Bond fig 71valuation formula Eq 71note setNote that present value of the bond is made of TWO parts added togetherPV coupon annuity part Chpt 6ntCR x Face Valuen111YTMnYTMnnt A 111ininPV Face Value lump sum at maturity Chpt 5ntFace Value1 YTM ntntPV A 111ininFace Value1 YTMB coupon basically annuityface value basically lump sumfor our purposes n will usually1 or 2PV couponmarket rate only thing that changesinverse relationship between interest rates and bond ratesYTM only thing that really influences the bond because everything else is fixedExample on page 194Coupon Rate CR8 the bond will pay this much at the end of each period fixedFace Value fv1000YTM8 market rate can go up or down variablet10 yearsn1When CRYTM PV will always be the face valuetn dont matterSection 71CR14 fv1000 YTM16 n2 t7 years2 x 7 2 x 7PV 1000 11116216210001 16B577103404691756What ifPresent Value of BondYTMCRPremium to Face ValueExample 71 if YTM14YTMCREqual to Face ValueFigure 71YTMCRDiscount to Face ValueExample 71hold 14 CR bond new bonds going for 12 CRyours is worth more and more attractive because getting more back than the new bondsbonds are easier to value and understand than stocks because interest rate is the only variable everything else is fixedwith stocks the company is forever theoretically so you dont know the time also board of directors decide on how much dividends to pay out vs fixed payment with bonds and goes on forever vs fixed time with bondsFigure 72 on page 19730 year bond vs 1 year bondInterest RateYTMif CR10interest rate has more effect on longer term bonds
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