Finance Quiz on Bonds and Commercial Paper

Study Notes

Be able to calculate the cost of a cash discount.
Understand the advantages and disadvantages of commercial paper.
Define a line of credit and explain its use by companies, including the annual cleanup process.
Describe factoring, both with and without recourse, and calculate its cost.
Define bond types: coupon, face value, convertible, floating rate, TIPS, zero-coupon, callable, and puttable.
Compare and contrast coupon rates for callable/puttable vs. ordinary bonds.
Understand bond risk levels based on issuer and maturity.
Identify factors impacting bond prices.
Determine if a bond trades at a discount, premium, or par.
Relate coupon rate to yield to maturity (YTM).
Define and calculate approximate YTM.
Calculate annual and semi-annual bond prices.
Calculate preferred and common stock prices using the dividend discount model, including zero and constant growth.
Calculate D₁ given D₀ or EPS.
Explain when the dividend discount model is appropriate and understand its advantages and disadvantages.
Calculate intrinsic stock value using book value per share and liquidation value. Evaluate the advantages and disadvantages of these methods.
Calculate the weighted average cost of capital (WACC) components.
Determine the best weightings for WACC.
Calculate earnings per share (EPS) (bonus).

Y'= (annual interest payment + principal payment - price of the bond) / 0.6 (price of the bond) + 0.4 (principal payment); Number of years until maturity
P₀ = D₁/(K₂ - g)
P₀ = D / (K₀ - g) ;P = D / K₂
WACC = (w_d × K_d) + (w_p × K_p) + (w_e × K_e)