Second Mid-term exam
- Determinants of interest rates
- Opportunity cost
- The relationship between bond ratings and interest rates
- The basis for the various premiums layered on the real risk-free rate for default, inflation, maturity and liquidity
- The term structure of interest rates
- Bond valuation
- Vocabulary (par, coupon, etc...)
- Cash flow patterns of bonds
- Present value of a bond and its relationship to interest rates: i.e. when does it trade at a discount or a premium?
- Yield to maturity versus yield to call - how to calculate
- Adjustments to present value formulas for semi-annual payments
- Convergence of bonds sold at a premium or a discount to par at maturity
- The risks of investing in bonds: price, reinvestment, default
- The role of the bond rating agencies
- Risk and return
- Defining a risk free asset versus a risky asset
- Risk as defined by standard deviation, coefficient of variation
A focus on how to interpret this information - not on how to calculate it
What is risk aversion?
- Diversifiable versus market risk
The benefits of diversification and the significance of asset correlation
- Stock valuation
- The components of the return on equity
Dividend yield and capital gains add up to a stock's total returnDividend discount models - using perpetuity present value formulas with and without growth