Study & Review
Guide – Exam 3 – Chapters 6-7
Chapter 6:
I. ST 6-1 Bond valuation, parts (a) and (c)
(a)
annual interest
payments, part (3) 10% discount rate or required rate of return:
[_] C ALL
1 [_] P/YR
0.80 x $1,000 = $80 of interest (or
move decimal one place to right from 8%) [PMT]
1000 [FV]
12 [N]
10 [I/YR]
Press [PV] because you want today’s
value estimate -> -$863.73 is
what I would pay for it today. It is
less than $1,000, selling at a discount, because the required return >
coupon rate (10% > 8%).
(b)
semi-annual interest payments:
[_] C ALL
2 [_] P/YR
0.80 x $1,000 = $80 / 2 = $40 of
interest (or move dec. one place to right from 8%)
-> [PMT]
1000 [FV]
12 [_][N] (should now
see 24 in display)
10 [I/YR]
Press [PV] because you want today’s
value estimate -> -$862.01 is
what I would pay for it today.
II. Practice Yield-to-Maturity with both annual and
semi-annual interest payments (see handout given in class).
III. Be able to plot a yield curve (Problem 6-1) and interpret what it says about (a) long-term versus short-term interest rates today (upward-sloping shows long rates being higher than short rates, flat yield curve shows us the rates are the same, and downward-sloping shows us long rates today being lower than short rates); and (b) future interest rates (upward-sloping tells us rates should go up, flat tells us rates will stay the same, downward-sloping tells us rates should fall).
IV. Be able to read a bond quote
and interpret it and all other items in the Wall St. Journal bond table (pg.
245), doing all calculations shown in class.
(Problem 6-6; I will provide the column headings, tho). Be able to do the same with a stock quote
(Problem 7-5), along with all calculations shown on handout.
V. Practice and interpret, using Problem 6-14, what happens
when interest rates in the marketplace (and, correspondingly, required rates of
return) change: what happens to the
prices of existing (“outstanding”) bonds when rates go up? When rates go down?
Chapter 7:
VI. Be able to calculate the value of a stock if its dividend is the same every year (Problem 7-6).
VII. Be able to calculate the growth rate of dividends growing at a roughly constant rate (Problem 7-11), and then use that to calculate the value of a stock once given the required rate of return.
VIII. Be able to calculate a price (value) estimate if given expected EPS and the P/E multiple for that stock’s industry (Problem 7-16).
IX. Be able to calculate all stock quote numbers on your handout. Also see Problem 7-5. I will ask you to memorize the dividend yield formula and the PE ratio formula:
Dividend yield = $ Dividend / Current Stock Price
PE Ratio = Price / EPS
(and be able to calculate EPS)
X. Be able to write out Proverbs 22:3, the Principle of Risk Avoidance.
XI. Know the ethics boxes from “Can We Trust the Bond
Raters?” (pg. 247) and “Do Investors Now Require a ‘Credibility Premium’?” (pg. 289).