Notes From Right Before the Midterm

Fin6600.91 Midterm Format

I. ch 1-2
II. ch 12 - 13
III. WSJ articles
IV. ch 3
V. ch 23
Vi. Mergent Online data manipulation

Each roman numeral is worth 20 points & the total exam is worth 120 points

bonds = leverage

C= periodic coupon in $
F = Face Value in $
k = (mkt) discount rate

when the discout rate = coupon rate the bond costs face value

you have to read the indenture to find out if a bond is callable

typically a bond can be called at a fixed price which is ussually face+1year interest periond and there is often a "black-out" period (typically 5 years) when the bond can not be called

In order to repurchase stock without underwriting you must have Free Cash Flow FCF

Price and return move in inverse directions

Higher return = lower price

Learn to deal with sinking fund

high yield (below bbb)

dont forget to take into consideration the flotation costs

An 8% coupon, 30-yr annual coun bond is issued w/ 2% floatation cost. It's also issued at a discount at $980. Find the cost of the bond to the firm/issuer in %.

n=30,
i/y=? 8.3677
PV = -960
PMT = 80
FV = 1000

What is the YTM for the bond buyer?
n= 30
pv = -980
PMT = 80
FV = 1k
cpt i/y = 8.18

rate of return went up

Random Notes From Class

real assets are such that one can stake a claim to it

Scarce loan-able funds are also known as capital

privatize profits and socialize losses

if i drive a pickup truck to haul cleaning equipment, it is called a capital good, but if you drive it to be macho, it is a consumer good

Liquidity - ease to convert without significant loss in value

senate and house are the only ones that can actually spend money

whatever the president wants to spend money on is subject to congress's and senate's approval

Money Markets are anything with 1 year or less of remaining maturity

Fed fund market
big banks tend to run reserve deficits
small banks tend to run reserve deficits

fed fund rate is determined by fomc- Federal open market committee

Capital Market Instruments
Bonds - are long term
notes - are only up to 10 years
Common & preferred stock


negotiated market - the issuer chooses the investment bank based on an ongoing relationship

utility companies are not allowed to choose issuer because they are in a monopolistic market

Nasdaq is dealer market that do not require brokers

Real estate is much more like an auction market

S= T+2

Sentiment = Transection + 2 business days

transaction costs and taxes are major

Efficient markets - prices adjust immediately because they instantly reflect value- no profit opportunity even for insiders - no need for intervention


seewater - berkley and Harvard

freedman is a freshwater market affiliation (efficiaent market hypotheses)

Message to Professor

Dear Professor,

We have chosen a hypothesis that we would like to research. However, before moving forward, we would like your input.

We hypothesize that high interest rates negatively effect the financial performance of the auto industry.

In order to prove or disprove this hypothesis we will look at financial indicators of specific automakers compared to various time periods. Some of the financial indicators we will consider include: sales, earnings per share, net income, and stock price. The time periods we will consider will include: periods of high, medium, and low interest rates.

We hope this study meets your expectations, but if not, your thoughtful guidance is appreciated.

Thank you,
Group 2