MBA 530  Test 2
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Required Rate of Return (bonds)
r_{d}
 r_{d }= I_{ }
 = to coupon rate if bond sells at par

N for Bonds
Number of Years to matury. *2 for Semiannual

Dollars of Interest Paid each year
 INT = PMT
 Coupon Rate x Par Value

Discount Bond
Interest > Coupon Rate & Bond < Par Value

Premium Bond
Interest < Coupon Rate & Bond > Par Value

Semi Annual Bonds
 PMT=PMT/2
 N=N*2
 r_{d} = I/2

Current Yield (Bond)
 Pmt / PV
 = Total Yield  Capital Gains Yield
 Bond payout / sale price

Capital Gain Yield (Bond)
(Par_{S}  Par_{P}) / Par_{P}

Total Rate of Return (Yield) (Bonds)
[Sum of Payments + (Par_{S}  Par_{P})] / Par_{P}

YTM (Yield to Maturity) (Bond)
 Rate of Interest if Held to matury.
 Enter N, PV, PMT, FV
 CPT I/Yr

YTC (Bonds)
Yield to Call. When intrest rates go down corporations will call bonds if they can and replace with cheaper ones.
 Enter N, PV, PMT, FV
 CPT I/Y

r* (Bond)
 Real Risk free rate of interest
 = rate on short term treasury bond with no inflation
 int rate on a riskless security assuming no inflation

r_{d} = ? (bond)
 r* + IP + DRP + LP + MRP
 = Rrf + DRP + LP + MRP
 IP = Inflation Risk Premium
 DRP = Default " "
 LP = Liquidity " "
 MRP = Market " "

rate of return (stock)
(amount received  amount invested) / amount invested

Expected Rate of Return (stock)
 sum of weighted averages
 wi pi (amount of stock i in portfolio x price of i)

Deviation
Subtract expected rate of return from a possible outcome

Variance  Sigma^{2}
sum of each deviation x probability

Std Deviation
 Square root of variance
 1 STD = 68.26%
 2 STD = 95.46%
 3 STD = 99.74%

expected porfolio return
 weighted average of returns in portfolio
 wi = amt invested in stock i * rhat_{i} = expected return of stock i

diversifiable risk
unique to a firm and can be cancelled out by good things happening to another firm hence eliminated by diversification

market risk
not eliminated by diversification. 2008 crash for example

relevant risk
stocks contribution to portfolio risk

beta
stocks ricks in relation to the market

MRP
 market risk premium
 MRP = R_{M}  R_{F}

Risk Premium for Stock i
 RP_{i} = bi(MRP)
 RP_{i} = bi(R_{M}R_{F})

Required Return (stock)
 Risk Free Return + Risk Premium
 = R_{f} + b_{i}(R_{m}R_{f})
 = R_{f} + b_{i}(MRP)

Dt
_{Dividend at the end of year t}

D_{0}
Most recent dividend (not given to purchaser)

D_{1}
Initial dividend (for purchaser)

P_{0}
 Market price of stock today
 = PV of Future Dividends

PHAT_{t}
expected price at end of each year t

Dividend Yield (Stock)
D_{i}/P_{0}

Capital Gains Yield (this year, stock)

g (stock)
growth rate in dividends

r_{s (stock)
}
required rate of return of a stock

rHAT_{s (stock)
}
 Expected rate of return of a stock
 = dividend yield + capital gains yield

rBAR_{s (stock)
}
Actual/Realized rate of return (what you actually got)

PHAT_{0 (stock valuation)
}
=

PHAT_{0 (stock valuation)
g = 0 }
D/r_{s}

PHAT_{n (stock)
}
PV of non constant dividends + PV of Constant dividends

D_{t (stock)
}
 Dividend at time t
 P_{0}(1+g)^{t}

V_{PS
Value of Preferred Stock }
 = P_{PS}/r_{PS}
 Price of Preferred Stock / return of prevered stock


r_{i
return of stock i }
 r_{f} + (R_{M}  R_{f})b
 rf + MRP*b