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Fundamentals of Corporate Finance(Richard ABrealey)

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Fundamentals of Corporate Finance(Richard ABrealey)of

Chapter 1The Corporation and the Financial

    ManagerCOPYRIGHT??ZHULI1;;Objectives1.Give examples of the investment and financing decisions that financial managers make, and explain the responsibilities of the CFO, treasurer, and controller2.Cite some of the advantages and disadvantages of organizing a business as a corporation3.Explain why maximizing market value is the logical financial goal for the corporation4.Understand why conflicts of interest arise, especially in large, public corporations5.Explain how corporations mitigate conflicts and encourage ethical, cooperative

    behaviorCOPYRIGHT??ZHULI4;;Content??Investment and financing

    decisions??What is a corporation???Who is the financial manager???Goals of the corporationCOPYRIGHT??ZHULI5;;Making good investment and financing decisions is the chief task of the financial manager.COPYRIGHT??ZHULI6;;The Investment Decision ??Investment decision/capital budgeting decision: decision to invest in tangible or intangible assets??If a project‘s value is greater than its required investment, then the project if attractive financiallyInvestments in automobile plantInvestments in research and development (R&D)COPYRIGHT??ZHULI7;;The Financing

    Decision ??Financing decision: the form and amount of financing of a firm‘s

    investment??Thechoice between debt and equity financing is often called the capital structure decisionIssue shares of stockborrow from a

    bankCOPYRIGHT??ZHULI8;;Financing and investment decisions are

    connected??The amount of investment determines the amount of financing that has to be raised??The investors who contribute financing today expect a return on that investment in the future??Thus, the investments that the firm makes today have to generate future returns for payout to investorsCOPYRIGHT??ZHULI9;;Investment decision: 投资决

    Financing decision: 筹资决策Capital budegting decision: 资本预算决策Tangible

    assets: 有形资产Intangible assets: 无形资产Debt financing: 债务资金、债务筹资

    Equity financing: 权益资金、权益筹资Capital structure: 资本结构

    COPYRIGHT??ZHULI10;;Content??Investment and financing decisions??What is a corporation???Who is the financial manager???Goals of the

    corporationCOPYRIGHT??ZHULI11;;Corporation??Corporation: business organized as a separate legal entity owned by stockholders??A corporation is legally distinct from its owners, therefore confers limited liability??The separation of ownership and management is one distinctive feature??There is an important tax drawback: double taxationCOPYRIGHT??ZHULI12;;Corporation: 公司Stockholder/shareholder: 股东

    Legal entity: 法人实体Limited liability: 有限责任The separation of ownership and

    management: 所有权与经营权相分离

    COPYRIGHT??ZHULI13;;Content??Investment and financing decisions??What is a corporation???Who is the financial manager???Goals of the

    corporationCOPYRIGHT??ZHULI14;;Financial managers in large corporationsChief Financial Officer (CFO)Responsible for:Finanical policyCorporate

    planningTreasurerControllerResponsible for:Responsible for:Cash

    managementPreparation of financial statementsRaising capitalAccountingBanking relationshipstaxesCOPYRIGHT??ZHULI15;;Chief Finanical Officer (CFO): 财务总

    Treasurer: 资金管理人员、司库人员Controller: 会计主管人员

    COPYRIGHT??ZHULI16;;Content??Investment and financing decisions??What is a

corporation???Who is the financial manager???Goals of the

    corporationCOPYRIGHT??ZHULI17;;Market value maximization??Value

    maximizationis the natural financial goal of the firm??Maximizing value maximizes the wealth of the firm‘s owners, its shareholders??Shareholders can invest or consume that wealth as they wishProfit maximizationCOPYRIGHT??ZHULI18;;Ethics and value maximization??Modern finance does not condone attempts to pump up stock price by unethical means??The surest route to maximum value starts with products and services that satisfy customers??A good reputation with customers, employees, and other stakeholders is also important for the firm‘s long-run profitability and

    valueCOPYRIGHT??ZHULI19;;Shareholders want managers to maximize market value.Do managers really maximize value?COPYRIGHT??ZHULI20;;Agency

    problem??Owner-managers have no conflicts of interest in their management of the business.??In most large corporations, the managers are not the owners, and so managers may act in ways that are not in the best interests of shareholders. (agency problem)StakeholdersCOPYRIGHT??ZHULI21;;How do corporations ensure that managers‘and stockholders‘interests coincide???Compensation plan: link the well-being

    of employees to that of the firm??Monitoring of management by the board of directors, security analysts, and creditors??Threat of takeoverCOPYRIGHT??ZHULI22;;Value maximization: 价值最大化Shareholders: 股东Stakeholders: 利益相关者Profit

    maximization: 利润最大化Owner-manager: 业主经理人Agency problem: 代理问题

    Compensation plan: 薪酬计划Board of directors: 董事会Security analyst: 证券分析师

    Creditor: 债权人Takeover: 接管COPYRIGHT??ZHULI23;;The

    End!COPYRIGHT??ZHULI24;;Chapter 2Why corporations need financial markets and institutionsCOPYRIGHT??ZHULI1;;Objectives1. Understand how financial markets and institutions channel savings to corporate investment 2. Understand the basic structure of mutual funds, pension funds, banks, and insurance companies3. Enumerate the functions of financial markets and institutions4. Understand why the cost of capital for corporate investment is determined by investment opportunities in financial marketsCOPYRIGHT??ZHULI2;;Content??Why finance matters ??The flow of

    savings to corporations ??Functions of financial markets and intermediaries??Value maximization and the cost of capital COPYRIGHT??ZHULI3;;A modern financial system offers financing in many different forms, depending on the company‘s age, its

    growth rate, and the nature of its business.Financial markets: 金融市场Financial

    institutions: 金融机构Financial system: 金融系统

    COPYRIGHT??ZHULI4;;Content??Why finance matters ??The flow of savings to corporations ??Functions of financial markets and intermediaries??Value maximization and the cost of capital COPYRIGHT??ZHULI5;;The money that corporations invest in real assets comes ultimately from savings by investors. But there can be many stops on the road between savings and corporate investment. The road can pass through financial markets, financial intermediaries, or both.Investors purchase shares with personal savings (1), which are invested (2). The business generates cash (3), which is reinvested (4a) or paid out to shareholders (4b). Reinvestment (4a) represents additional saving on behalf of shareholders.COPYRIGHT??ZHULI6;;Market where securities are Financial marketsissued and traded??tSoc kmarekt (equity market) ??Primary market: market for the sale of new securities by corporations ??Secondary market: market in which previously issued securities are traded among investors ??Fixed-income market: market

    for debt securities ??Capital market: market for long-term debt and equity ??Money market: market for short-term financing (less than 1 year)

    COPYRIGHT??ZHULI7;;Financial intermediaries &institutions??Financial intermediary: an organization that raises money from many investors and provides financing to individuals, corporations, or other organizations??Mutual fund ??Pension fund ??Financial institution: a bank, insurance company, or similar financial intermediaryCOPYRIGHT??ZHULI8;;Real assets: 实物资产Stock market: 股票市

    Primary market: 初级市场Secondary market: 二级市场Fixed-income market: 固定

    收益市场Bond market: 债券市场Capital market: 资本市场Money market: 货币市场

    Commodities market: 商品市场Foreign-exchange market: 外汇交易市场Mutual fund:

    共同基金Pension fund: 养老基金Options: 期权Derivatives: 衍生金融工具

    COPYRIGHT??ZHULI9;;Content??Why finance matters ??The flow of savings to corporations ??Functions of financial markets and intermediaries??Value maximization and the cost of capital COPYRIGHT??ZHULI10;;Functions o fifnancial markets and intermediaries??Channeling savings to real investment ??Transporting cash across time ??Risk transfer and diversification ??LiquidityDiversification: 分散投资 Liquidity:

    流动性??The payment mechanism ??Information provided can be used

    COPYRIGHT??ZHULI11;;Content??Why finance matters ??The flow of savings to corporations ??Functions of financial markets and intermediaries??Value maximization and the cost of capital COPYRIGHT??ZHULI12;;aVlue maximization??Financial objective of the firm: maximize the current market value of shareholders‘ investment??A corporation‘s roster of shareholders will usually include both risk-averse and risk-tolerant investorsCOPYRIGHT??ZHULI13;;The opportunity cost o fcapital??ehT cost o fcapital is the minimum acceptable rate of return for capital investment??Investment projects offering rates of return higher than the cost of capital add value to the firm ??Projects offering rates of return less than the cost of capital actually subtract value and should not be undertaken??Superior rate of return means an expected rate of return higher than the return investors could achieve from alternative investments at the same level of riskCOPYRIGHT??ZHULI14;;The expected rates of return on investments in financial markets determine the cost of capital for corporate investmentsCOPYRIGHT??ZHULI15;;??The cost of capital is an opportunity cost, that is, a rate of return that investors could earn in financial markets??For a safe capital investment, the opportunity cost is the interest rate on safe debt securities, such as high- grade corporate bonds??For riskier capital investments, the opportunity cost is the expected rate of return on risky securities, investments in the stock market, for exampleCOPYRIGHT??ZHULI16;;Risk-averse: 风险厌恶型Risk-tolerant: 风险容

    忍型Cost of capital: 资本成本Superior rate of return: 超额收益率Expected rate of

    return: 期望收益率Opportunity cost: 机会成本Corporate bond: 公司债

    COPYRIGHT??ZHULI17;;The End!COPYRIGHT??ZHULI18;;Chapter

    3Accounting and finance;;Objectives1. Interpret the information contained in the balance sheet, income statement, and statement of cash flows2. Distinguish between market and book values3. Explain why income differs from cash flow 4. Understand the essential features of the taxation of corporate and personal income;;Content??The balance sheet ??The income statement ??The statement of cash flows ??Accounting practice and malpractice ??Taxes ;;The balance sheet presents a snapshot of the

firm‘s assets and liabilities at one particular moment;;Assets??The assets represent the

    uses of cash raised ??There are two classes of assets ??Current assets: assets that will soon be used or turned into cash, e.g. accounts receivables, inventories ??Long-term or fixed assets ??aTngible assets e.g. buildings, equipment ??Intangible assets e.g. brand, goodwill ;;iLabilities??The liabilities represent the sources of the cash ??There are two classes of liability ??Current liabilities: liabilities that are due for payment shortly, e.g. accounts payable ??Long-term liabilities e.g. bond payable ??Net current assets/net working capital = current assets current liabilities;;hSareholders‘ euqity??The

    difference between the assets and the liabilities represents the amount of the shareholders‘ equity??Shareholders‘ equity are called ‗residual claimants‘, which means that shareholders‘ equity is what left over when the liabilities of the firm are subtracted from its assetsShareholders‘ equity = total assets – total liabilities;;;;oBok

    values and market values??Items in the balance sheet are valued according to generally accepted accounting principles (GAAP)??Book values are ―backward-looking‖ measures

    of value??Market values of assets and liabilities do not generally equal to the book value??oBo kvalues are based on historical or original values ??Market values measure current values of assets and liabilities ;;??The difference between book value and market value is likely to be greatest for the shareholders‘ equity??The book value of equity measures the cash that shareholders have contributed in the past plus the cash that the company has retained and reinvested in the business on their behalf??The market value of equity is measured by market price of the firm‘s shares ??Market-value

    balance sheet is forward-looking ;;Balance sheet: 资产负债表Current assets: 流动资

    Long-term or fixed assets,长期资产/固定资产Tangible assets: 有形资产Intangible

    assets: 无形资产Current liabilities: 流动负债Long-term liabilities: 长期负债Working

    capital: 营运资本Shareholders‘ equity: 股东权益Book value: 账面价值Market value:

    市场价值GAAP: 通用会计原则;;Content??The balance sheet ??The income

    statement ??The statement of cash flows ??Accounting practice and malpractice ??Taxes ;;The income statement shows how profitable the firm has been during the past year;;rPoifts versus cash lfow??Income is not the same as cash flow. There are two reasons:1. Investment in fixed assets is not deducted immediately from income but is instead spread over the expected life of the equipment2. The accountants records revenues when the sale is made, rather than when the customers actually pays the bill, and at the same time deducts the production costs even though those costs may have been incurred earlier;;Income statement: 利润表eNt sales: 销售净额Cost of goods sold:

    销售成本Selling, general & administrative expenses: 销售及一般管理费用

    Depreciation: 折旧Earnings before interest and income taxes (EBIT): 息税前收益eNt

    income: 净利润Cash flow: 现金流量;;Content??The balance sheet ??The income

    statement ??The statement of cash flows ??Accounting practice and malpractice ??Taxes ;;The statement of cash lfosw shows the firm‘s cash inflows and outflows from operations as well as from its investments and financing activities;;Cas hlfo wrfom operations starts with net income but adjusts that figure for those parts of the income statement that do not involve cash coming in or going The statements of cash outflows: 现金流量表Cash flow from operations: 经营活动所带来的现金流量Cash flow from

    investments: 投资活动所带来的现金流量Cash flow from financing activities: 筹资活

    动所带来的现金流量 ;;Content??The balance sheet ??The income statement ??The

    statement of cash flows ??Accounting practice and malpractice ??Taxes ;;??U.S. accounting rules are spelled out by the Financial Accounting Standards Board (FASB) and its generally accepted accounting principles (GAAP)??Yet inevitably, rules and principles leave room for discretion. Managers under pressure to perform may be tempted to take advantage of leeway in how they measure earnings and book values to present their financial statements in the best possible light. And in more extreme cases, some companies simply break the rules??In response to a series of scandals, Congress passed the Sarbanes-Oxley Act in 2002. The act attempts to ensure that the firm‘s financial

    reports accurately represent its financial condition;;Financial Accounting Standards Board (FASB): 财务会计准则委员会Financial statements: 财务报表Sarbanes-Oxley

    Act: 萨班斯?奥克斯利法案 ;;Content??The balance sheet ??The income

    statement ??The statement of cash flows ??Accounting practice and malpractice ??Taxes ;;??Corporate tax ??For large companies the marginal rate of tax on income is 35% ??In calculating taxable income the company deducts an allowance for depreciation and interest payments. It cannot deduct dividend payments to the

    shareholders??Personal tax ??Individuals are also taxed on their income, which includes dividends and interest on their investments ??Capital gains are taxed, but only when the investment is sold and the gain realized ;;Corporate income tax: 企业所得税Personal

    income tax: 个人所得税Taxable income: 应税收益Marginal tax rate: 边际税率Capital

    gains: 资本利得;;The End!;;Chapter 4The time value of money;;Objectives1.

    Calculate the future value to which money invested at a given interest rate will grow2. Calculate the present value of a future payment3. Calculate present and future values of a series of cash payments4. Find the interest rate implied by present and future values5. Understand the difference between real and nominal cash flows and between real and nominal interest rates.6. Compare interest rates quoted over different time intervalsfor

    example, monthly versus annual rates.;;Content??Future values and compound interest ??Present values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;Suppose you have $100 invested in a bank account, interest rate of 6 %per yearInterest in year 1 =.06 ×1$00 =6$Value of investment after 1 year =1$006$+ =1$06Interest in year 2 =.06 ×1$06 =6$.36Value of investment after 1 year =1$066$+.36 =$112.36;;Future value: amount to which an investment will grow after earning interestFor an interest rate of r and a horizon of t years,tFuture value of 1$00 =1$00×(1+r);;Compound interest: interest earned on interestSimple interest;;How an investment of 1$00 grows with compound interest at different interest rate;;An example of a future value table, showing how an investment of 1$ grows with compound interesttFV factor =(1r+);;Future value: 终值、未来价值Compound

    interest: 复利Simple interest: 单利;;Content??Future values and compound

    interest ??Present values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;1$00 invested for 1 year at 6 %will grow to 1$06 (100×1.06)How much we need to invest now in order to produce 1$06 at the end of the year?Present value =future value/l.06 =1$00;;In general, for a future value or payment t periods awaytPresent value =future value after t periods/(1r+)??Present value (PV): value today of a future cash flow ??To calculate present value, we discounted the future value at the interest rate r. The calculation is therefore termed a discounted cash flow (DCF) calculation, an the

    interest rate r is known as the discounted rate;;Present value of a future cash flow of 1$00The longer, the less it is worth today;;An example of present value table, showing the value today of 1$ received in the futuretDiscount factor =1/(1r+);;Present value: 现值Discounted cash flow: 折现现金流Discounted rate: 折现率、贴现率Discounted

    factor: 折现系数;;Content??Future values and compound interest ??Present

    values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;Future value o fmultiple cash lfoswSuppose you plan to save some amount of money each year to purchase a computer. You might be able to put 1$200 in the bank, a second deposit of 1$400 in 1 year, and a third deposit of 1$000 in 2 years.If you earn an 8 %rate of interest. How much be available to spend 3 years from now?;;To find the value at some future date of a stream of cash flows, calculate what each flow will be worth at that future date, and then add up these future values.;;rPesent value o fmultiple cash lfoswSuppose your auto dealer gives you a choice between paying 1$5500 for a new car or entering into an installment plan where you pay 8$000 down today and make payments of 4$000 in each of the next 2 years. Assume that the interest rate you can earn on safe investments is 8.%Which is the better deal?;;The present value of a stream of future cash flows is the amount you need to invest today to generate that stream. To find the PV, you just calculate the PV of each flow and then add them.1$5133.06 <15500The installment plan is preferable;;Multiple cash flow: 多重现金流Installment: 分期付款Deposit:

    ;;Content??Future values and compound interest ??Present values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;??Annuity: equally spaced level stream of cash flows, with a finite maturity??Perpetuity: stream of level cash payments that never ends??Annuity due: level stream of cash flows starting immediately;;oH wto value perpetuitiesSuppose that you could invest 1$00 at an interest rate of 10.% You would earn annual interest of .10 ×1$00 =1$0 per year and could withdraw this amount from your investment account each year without everrunning down your balance. In other words, a 1$00 investment could provide a perpetuityof 1$0 per year.In general,Cash payment from perpetuity =interest rate ×present valueC =r ×PV;;PV of perpetuity =C/r =cash payment/interest rateTwo warnings about the formula1. Do not confuse the formula with the present value of a single cash payment 1/(1+r)2. The value of a regular stream of payments starting one period from nowDelayed perpetuity;;oH wto value annuitiesThe value of an annuity is equal to the difference between the value of two perpetuities3Present value of a 3-year 1$ annuity =1/r 1/r(1r+);;tPresent value of

    t-year annuity =C 1[/r 1/r(1r+)]Present value of t-year annuity =payment ×annuity

    factorAn example of an annuity table, showing the present value today of 1$ a year received for each of t years;;To find the value of an annuity, you can calculate the value of each cash flow. It is usually quicker to use the annuity formula.;;Future value o fan annuitySuppose you are setting aside 3$,000 at the end of every year in order to buy a car. If your savings earn interest of 8 percent a year, how much will they be worth at the end of 4 years?PV =3$,000 ×4-year annuity factor;;An example of a table showing the future value of an investment of 1$ a year for each of t years;;Annuities duePresent value of an annuity due =PV of an ordinary annuity ×(1r+) Future value of annuity due =FV of ordinary annuity ×(1r+);;Annuity: 年金Perpetuity: 永续年金Annuity due:

    付年金Delayed perpetuity: 递延永续年金;;Content??Future values and compound

    interest ??Present values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;eRal versus nominal cash lfosw??An overall general rise in price is known as inflation ??Economists track the general level of prices using several different price indexes. The best known is the consumer price index (CPI)??Current or nominal dollars refer to the actual number of dollars of the day??Constant or real dollars refer to the amount of purchasing power;;Inlfation and interest rates??Nominal interest rate: rate at which money invested grows??Real interest rate: rate at which the purchasing power of an investment increases1r+eal interest rate =(1n+ominal interest rate)/(1i+nflation rate) Real interest rate ?nominal interest rate –inflation rate;;aVluing real cash

    paymentsSuppose that the nominal interest rate is 10.%How much do you need to invest now to produce 1$00 in a year‘s time?PV =1$00/1.10 =9$0.91Assume that you

    expect inflation of 7 %over the next year. The real value of that 1$00 is therefore only 1$00/1.07 =9$3.46. Also with a 7 %inflation rate, the real rate of interest is 2.8%PV =9$3.46/1.028 =9$0.91The two should give the same answer!;;Current dollar cash flows must be discounted by the nominal interest rate; real cash flows must be discounted by the real interest rate.Inflation: 通货膨胀consumer price index (CPI): 消费者物价指

     Current or nominal dollars: 流动美元或名义美元 Constant or real dollars: 不变美

    元或实际美元 oNminal interest rate: 名义利率Real interest rate: 实际利率

    ;;Content??Future values and compound interest ??Present values ??Multiple cash flows ??Level cash flows: perpetuities and annuities ??Inflation and the time value of money ??Effective annual interest rates ;;How should we compare rates when they are quoted for different periods, such as monthly versus annually?Consider your credit card. Suppose you have to pay interest on any unpaid balances at the rate of 1 %per month. What is it going to cost you if you neglect to pay off your unpaid balance for a year?12 You will need to repay $100 ×(1.01) =112.68The interest rate of 1 %a month is equivalent to an eeffctive annual interest rate, or annually compounded rate, of 12.68%121e+ffective annual rate =(1m+onthly rate);;Short-term rates are sometimes annualized by multiplying the rate by multiplying the rate per period by the number of periods in a year. Such rates are called annual percentage rates (APRs)The APR on the loan =12 ×1 % =12%mEffective annual rate =(1A+PR/m)-1;;Effective annual interest rate or annually compounded rate: 实际年利率Annual percentage rate (APR):

    年利率;;The End!;;Chapter 5Valuing bonds;;Objectives1. Distinguish among a bond‘s coupon rate, current yield, and yield to maturity2. Find the market price of a bond

    given its yield to maturity, find a bond‘s yield given its price, and demonstrate why prices and yields vary inversely3. Show why bonds exhibit interest rate risk4. Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;??oBnd: security that obligates the issuer to make specified payments to the bondholder ??Coupon: the interest payments paid to the bondholder ??Face value or principal: payment at maturity of the bond. Also called par value or maturity value ??Coupon rate: annual interest payment as a percentage of face value ;;Consider a U.S. Treasury bond as an example. Several years ago, the U.S. Treasury raised money by selling 5.5% coupon, 2008 maturity Treasury bonds. Each bond has a face value of $1000. Suppose that in 2005 you decided to buy the

    5.5 %coupon bonds maturing in 2008. If you planned to hold the bond until maturity, the cash flows would be as follows:;;Face valueCoupon paymentBond prices are quoted in 32nds rather than decimalse.g. 105:32 means that the price is 105 and 23/32, or 105.719,% therefore each bond costs 1$057.19;;Bond: 债券Coupon: 息票Face value

    or par value : 面值Principal:本金Maturity value: 到期值Coupon rate: 票面利率

    ;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;How much would you have been willing to pay for the bond?The value of a security is the present value of the cash flows it will pay to its owners. To find this value, we need to discount each future payment by the current interest rate.;;Assume almost identical bonds maturing at the same time offered an interest rate of about 3.5.%This is the rate that investors could earn by placing their funds in similar securities rather than this bond. pOportunity cost o fcapital23 PV =55/(1.035)5+5/(1.035)1+055/(1.035) =1$056.03 >1$000PV =PV (coupons) +PV(face value) =(coupon×annuity

    factor)(+face value×discount factor);;How bond prices vary with interest ratesSuppose that investors demanded an interest rate of 5.5 %on 3-year treasury bond. What would be the price?23 PV =55/(1.055)5+5/(1.055)1+055/(11+.055) =1$000The bond sells for its face value.Suppose that the interest rate is 15%PV =783.09 <1000;;When the interest rate rises, the bond prices fall. Conversely, declines in the interest rate result in higher prices. Do not confuse coupon payment with interest rate!;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;Suppose you are considering the purchase of a 3-year bond with a coupon rate of 10.% Your investment adviser quotes a price for the bond. How do you calculate the rate of return the bond offer?For bonds priced at face value, the rate of return is the coupon rate.;;Suppose that the market price of the 3-year bond is 1$136.16. What is the rate of return now?Current yield =100/1136.16 =8.8 %Current yield: annual coupon payments divided by bond prices;;The current yield focus only on current income and ignores prospective price increases of decreases, it dose not measure the bond‘s total rate of return.??Total return depends on both interest income and any capital gains or losses. ??A bond that is priced above its face value is said to sell at a premium. Investors who buy a bond at a premium face a capital loss over the life of the bond, so the return on these bonds is always less than the bond‘s current yield.??A bond that is priced

    below face value sells at a discount. Investors in discount bonds face a capital gain over the life of the bond, the return on these bonds is greater than the current yield.The yield to maturity is a measure of a bond‘s total return.;;Yield to maturity: the discount rate

    that makes the present value of the bond‘s payments equal to its price.If you can buy the 3-year bond at face value, the yield to maturity is the coupon rate, 10.%23 PV at 10 % =100/(1.10)1+00/(1.10)1+100/(1.10) =1000Suppose the price of the bond is 1$136.16, the yield to maturity is only 5.%23 PV at 5 % =100/(1.05)1+00/(1.05)1+100/(1.05) =1136.16;;The only general procedure for calculating yield to maturity is trial and error. You guess at an interest rate and calculate the PV of the bond‘s payment. If the PV

    is greater than the actual price, your discount rate must have been too low, so you try a higher interest rate. Conversely, if PV is less than price, you must reduce the interest rate. ;;Current yield: 当期收益率Capital gains or losses: 资本利得或损失Yield to

    maturity: 到期收益率Premium: 溢价Discount: 折价Trial and error: 试误法

    ;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;Suppose you buy the 5.5 %treasury bond today for a price of 1$056.03 and sell it next year at a price of 1$080. The return on your investment is the 5$5 coupon payment plus the price change of (1$080-1056.03) =2$3.97Rate of return =(coupon income +price change)/investment =(552+3.97)/1056.03 =7.48%aRte o freturn: total income per period per dollar investedDo not confuse the bond‘s rate or return over a particular investment period with its yield to maturity.;;When interest rates do not change, the bond price changes with time so that the total return on the bond is equal to the yield to maturity.If the bond‘s yield to maturity increases, the rate of return during the period will be less than that yield.If the yield to maturity decreases, the rate of return will be greater than that yield.;;Bond prices fluctuate as the interest rates change (interest rate risk). But all bonds are not equally affected by the changing interest rates.;;Bond rate of return: 债券收益率Treasury bond: 国债Interest rate risk: 利率风险

    ;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;The longer the maturity, the higher the yield.Yield curve: graph of the relationship between time to maturity and yield to maturity.;;??Even when the yield curve if upward-sloping, investors might rationally stay away from long-term bonds for two reasons.1. The prices of long-term bonds fluctuate much more than prices of short-term bonds.2. Short-term investors can profit if interest rate rise.??The real interest rate on the treasury bonds depends on the rate of inflation. ??Investors can nail down a real rate of interest by buying an indexed bond, e.g. Treasury Inflation-Protected Securities (TIPS);;Yield curve: 收益率曲线Long-term bond: 长期债券Indexed bond:

    指数债券Treasury inflation-protection security (TIPS): 通胀保护型债券

    ;;Content??Bond characteristics ??Interest rates and bond prices ??Current yield and yield to maturity ??Bond rates of return ??The yield curve ??Corporate bonds and the risk of default ;;State and local governments borrow by selling bonds, so do corporations.??There is an important distinction between bonds issued by corporations and those issued by the U.S. Treasury.??National governments don‘t go bankrupt, so

    investors do not worry that the U.S. Treasury will default on its bonds.??However, there is some chance that corporations may get into financial difficulties and may default on their bonds.??Investors demand higher promised yield if there is a high probability that the borrower will run into trouble and default. ;;Yield spreads between corporate and 10-year treasury bonds.;;??eDafult o(r credit )risk: the risk that a bond issuer may default on its bonds ??Default premium: the additional yield on a bond investors require for bearing credit risk ??Investment grade: bonds rated Baa or above by Moody‘s or BBB or above by Standard & Poor‘s ??uJn kbond: bond with a rating below Baa or BBB Zero-coupon bondFloating-rate bondConvertible bond;;Corporate bond: 公司债

    Default (or credit) risk: 违约风险或信用风险 Default premium: 违约风险溢价

    Investment grade: 投资等级uJnk bond: 垃圾债Zero-coupon rate: 零息债券

    Floating-rate bond: 浮动利率债券Convertible bond: 可转换债券;;The

    End!;;Chapter 6Valuing stocks;;Objectives1. Understand the stock trading reports in the financial pages of the newspaper2. Calculate the present value of a stock given forecasts of future dividends and future stock price3. Use stock valuation formulas to infer the expected rate of return on a common stock4. Interpret price-earnings

    ratios;;Content??Stocks and the stock market ??Book values, liquidation values, and market values ??Valuing common stocks ??Simplifying the dividend discount model ??Growth stocks and income stocks ;;??Firms issue shares of common stock to the public when they need to raise money. ??Common stock: ownership shares in a publicly held corporation ??Sales of new stock by the firm are said to occur in the primary market. There are two types of primary market issues: IPO and seasoned offerings??rPimary marekt: market for the sale of new securities by corporations ??Initial public offering (IPO): fist offering of stock to the general public ??Seasoned offering: sales of new shares by established firms ;;??Large companies usually arrange for their stocks to be listed on a stock exchange, which allows investors to trade existing stocks among themselves ??Secondary market: market in which previously issued securities are traded among investors ??The two principal stock markets in the U.S. are the eNw York Exchange (NYSE) and NASDAQ Dividend: periodic cash distribution from the firm to its shareholdersPrice-earnings (P/E) multiple: ratio of stock price to earnings per share;;Common stock: 普通股Primary market: 初级市场Initial public offering (IPO):

    首次公开发行Seasoned offering: 增发Stock exchange: 证券交易所Secondary market:

    二级市场New York Exchange (NYSE): 纽约证券交易所 NASDAQ: 纳斯达克

    Dividend: 股利Price-earnings (P/E) multiple: 市盈率;;Content??Stocks and the stock

    market ??Book values, liquidation values, and market values ??Valuing common stocks ??Simplifying the dividend discount model ??Growth stocks and income stocks ;;Book value: net worth of the firm according to the balance sheetLiquidation value: net proceeds that could be realized by selling the firm‘s assets and paying off its

    creditorsMarket value is not the same as book value or liquidation value. Market value treats the firm as a going concern;;??Book value records what a company has paid for its assets, less a deduction for depreciation. It does not capture the true value of a business??Liquidation value is what the company could net by selling its assets and repaying its debts. It does not capture the value of a successful going concern??Market value is the amount that investors are willing to pay for the shares of the firm. This depends on the earning power of today‘s assets and the expected profitability of future investments;;Book value: 账面价值Liquidation value: 清算价值Market value: 市场

    价值Going concern: 持续经营;;Content??Stocks and the stock market ??Book values,

    liquidation values, and market values ??Valuing common stocks ??Simplifying the dividend discount model ??Growth stocks and income stocks ;;Todays‘ price and

    tomorros‘w price??The cash payoff to owners of common stocks comes in two forms: (1) cash dividends and (2) capital gains or lossesExpected rate of return =r =(DIVP+-P)/P1 1 0 0= expected dividend yield +expected capital gain =DIV/P +(P-P)/P1 0 1 0 0??Never confuse the actual outcome with the expected outcome;;Price today =P =(DIV+P)/(1r+)0 1 1 For Blue Skies DIV =3$ and P =8$1. If stocks of similar risk 1 1 offer an expected return of r =12,% then 12 %is the opportunity cost of funds invested in Blue Skies. P0 =(38+1)/1.12 =7$57$5 is the right price, check this!At each point in time all securities of the same risk are priced to offer the same expected rate of return.;;The dividend discount model??A formula that requires tomorrow‘s stock price to explain today‘s stock price is not generally helpful ??As it turns out, we can express a stock‘s value as the present value of all the forecast future dividend paid by the company to its shareholders without referring to the future stock price. This is the dividend discount modelP =Present value of (DIV, DIV, DIV, ,… DIV, )…0 1 2 3 t Suppose we

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