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  • Concept of Bonds and Stocks

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    Seok Jin Kim
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    This document discusses key concepts related to bonds, stocks, and the time value of money. It defines bonds as a type of security that represents debt, where the bond issuer borrows money from investors. Stocks represent ownership in a company. The time value of money refers to the concept that money available at the present time is worth more than the same amount in the future due to interest, inflation, and investment growth. The document outlines various factors that influence bond and stock valuation such as coupon payments, maturity dates, yield to maturity, and risk premiums. It also discusses portfolio diversification and hedging strategies to manage investment risk.

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    CONCEPT OF BONDS AND STOCKS

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    This document discusses key concepts related to bonds, stocks, and the time value of money. It defines bonds as a type of security that represents debt, where the bond issuer borrows money from investors. Stocks represent ownership in a company. The time value of money refers to the concept that money available at the present time is worth more than the same amount in the future due to interest, inflation, and investment growth. The document outlines various factors that influence bond and stock valuation such as coupon payments, maturity dates, yield to maturity, and risk premiums. It also discusses portfolio diversification and hedging strategies to manage investment risk.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    10 views3 pages

    Concept of Bonds and Stocks

    Uploaded by

    Seok Jin Kim
    This document discusses key concepts related to bonds, stocks, and the time value of money. It defines bonds as a type of security that represents debt, where the bond issuer borrows money from investors. Stocks represent ownership in a company. The time value of money refers to the concept that money available at the present time is worth more than the same amount in the future due to interest, inflation, and investment growth. The document outlines various factors that influence bond and stock valuation such as coupon payments, maturity dates, yield to maturity, and risk premiums. It also discusses portfolio diversification and hedging strategies to manage investment risk.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 3

    I.

    CONCEPT OF BONDS AND STOCKS - time remaining until maturity date


    - time when bond was issued
    Real Assets
     Call Date
    - Tangible assets - for callable bonds
    - Physical characteristics - can be redeemed by the issuer before
    maturity
     Call Price
    - amount issuer has to pay to call a callable
    Securities
    bond
    - Financial asset  Required Return
    - Piece of paper representing a claim on an - rate of return the investor currently
    asset requires on a bond
     Yield to Maturity
     Direct securities - earned if bought on current market price
    - stocks and bonds - withheld until maturity
     Indirect securities  Yield to Call
    - Par/ Face Value of a Bond, Coupon - hold until call
    Rate, Coupon Payments - given that bond was called on call date
    - derivatives, future and options  Stocks
    - proof of ownership in biz
    - Does not generate cashflow - on equity section on BS
     Book Value
    - shown on the BS
    Bonds  Market Value
    - quoted in the market
    - Represents debt
     Liquidation Value
    - “Concept of bonds and stock”
    - Process of wrapping up the business
    - Long-term debt contract
     Fair Value/Intrinsic Value
    - Issued by the borrower to the lender - value of working asset future cashflow
    (calculated and summed up)
    - undervalued
    Types of Bonds

     Debentures
    - unsecured (no asset backing) II. TIME VALUE OF MONEY
     Mortgage Bond Interest
    - secured by real property (i.e., bond,
    house) - Received from lending money
    - Price a borrower must pay for credit

    Bond Valuation
    Length of Time
     Bonds
    - long-term securities - The more interest gains
    - issued by corp. or govnt.
     Coupon Payment
    - periodic interest payments Present Value
    - interest paid semi-annually until maturity
     Coupon Rate - Less than future amount
    - Fixed
    - expressed as a percentage the bond face
    value Future Value
    - interest cost issued to the issuer
    - Greater than present amount
     Par/Face Value
    - amount of money paid to the bondholders
    at maturity
    - amount of money borrowed by bond issuer Risk and Return
     Maturity Date
    - Safe peso is worth more than risk peso
    - date on which the bond matures
    - Cost of money
     Original Maturity
    - Demander of funds must pay - All investment and securities have certain
    amount of risk

    Inflation
    Interest Rate
    - Expected average inflation over the life of the
    - Applied to debt instruments (bank loans or
    investment or securities
    bonds)

    Default Risk Premium


    Required Return
    - Risk that a company might get bankrupt or
    - Applied equity required (common stock – give
    closedown and bonds or shares issued may
    investors ownership stake in issuer) collapse
    - Charged by investor as compensation against
    risk
    Portfolio Diversification

    - How to select diff. investment options to


    reduce risk of losing invested money Maturity Risk Premium

    - Linked to the life security


    - Longer than maturity period, the higher the
    Hedging and Risk Management maturity risk premium
    - Strategy of risk management employed by
    investor to reduce/minimize chances of loss
    Liquidity Risk Premium

    - General tendency investors prefer shot-term


    Insurance securities (more liquid securities)
    - Effective tool used to manage risk

    Sovereign Risk Premium


    Economic Theory - Risk of govnt. deposit on debt because of
    political/econ turmoil, war, etc..
    - Said that, “interest rate is an equilibrium price
    - Linked to foreign exchange (f/x) depreciation
    expressed in percentage term (demand and
    and devaluation
    supply of funds or Capital)

    Risk-Free Interest Rate (RF)


    v..

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