Bonds
Business Administration 441 with Becker-blease at Oregon State University
About this deck
By: Kyle Gannon
Created: 2011-05-16
Size: 22 flashcards
Views: 11
Created: 2011-05-16
Size: 22 flashcards
Views: 11
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Why is makes adjusted WACC adjusted
the tax shield
Bond
WACC = Re*We + Rd*Wd*(1 - Tc)
Equity
E(Re) = Rf + B (E(Rm) - rf)
What determines a bond's yield to maturity
its price
Formulas for Rd
E(rd)
Interest Expense / Average VD * B VD
Look at rating of debt
Company Announces its selling shares (lemons discount)
drop 2-3% cause the market figures that management believes shares are overvalued
Lemons Discount: Debt
Lemons discount does not exist in the debt market. When a company says its issuing more debt, the existing debt doesn't decrease in value.
Indentures
Concerned with maturity/ debt rolling.
Bulltet bonds - almost always roll their debt
Serial bond - company pays off (retires) a portion of the issue periodically
Security - secured vs unsecured debt holders
Senior/Subordinated Debt - Senior paid first
Convertible
Put-ability
Zero Coupons
Floating Rates
Callability
Adjusted WACC
don't use this if your not going to roll the debt
Pecking Order (in order of preference)
1) Internal Equity - retained earnings
2) External Debt
3) External Equity
Characteristics of Debt Characteristics
Convertibility: power to bond holder/ lower the coupon
Portability: power to bondholder/ lower the coupon
Callability: power to issuer/give them ability to refinance. (raise coupon)
Credit Ration
Investment Grade: AAA - BBB
Junk: BB - C
Mortgage Origination
Amortized Contract: Principal and Interest predetermined. As you go, more and more of your consistent payment amount is put towards the principal and less is put towards the interest
Mortgage Broker
Broker between the home buyer and seller
Mortgage Banker
Constructs the loan and sell it
Underwriting
PT/Ratio (payments to income) (30%)
LTV - Loan to Value Ratio: Companies typically like to lend 80% value of home. this gives companies a 20% cushion that homes can drop in value should the borrower default on payments.
Commitment Letter
Lock in rates while you're searching for a home. So like if rates go up in the weeks you search for a house, you don't get burned "fallout risk".
Classifying Schemes: Mortgages
1) Lien Status: first mortgage or second mortgage. Lender want primary lien cause they get paid back first.
2) Credit Classification: Prime (borrow has good credit, good ratios), Alt-A (not perfect but not terrible), Subprime (poor credit)
3) Interest Rates: fixed (most common) or adjustable
4) Amortization Type: fully amortized vs interest only
5) Credit Guarantees: HUD, Conventional - PUI (LTV greater than 80%)
6) Loan Balances (conforming, jumbo)
7) Prepayment Penalties :xtra payments, refi, sale
CRA (Community Reinvestment Act)
1977. Encourage lending to low and moderate income areas.
FHA (Fair Housing Act)
1968. Race, ethnicity, age, gender, marriage status cannot effect the mortgage
Equal Credit Opportunity Act
1974. Credit cannot be denied for race, age, ethnicity, etc. Cannot discriminate on public assistance as part of their income.
Adjustable Rate People
People looking to simply flip houses for a profit. these people usually only pay interest so when they saw that prices were going down in Q3 of 06 they sold of immediatly starting the spark.
About this deck
By: Kyle Gannon
Created: 2011-05-16
Size: 22 flashcards
Views: 11
Created: 2011-05-16
Size: 22 flashcards
Views: 11
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“I have used this website for three exams, and I see a huge difference in my test results.”
Naj
Naj