Finance at Hochschule Stralsund | Flashcards & Summaries

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the middle of the roaders theory

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divident policy is irrelevant- in a world without taxes, transaction costs or other market imperfections, supported by the modigliani and miller argument

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Rightists divident theory

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companies should pay high divident bc humans are not rational optimizers and markets are not perfect. argument that: 

  • there is natural clientele (people that don't understand MM argument and need company to get cash), 
  • when paying out funds the cash can not be misused 
  •  dividends as signals (not really)
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TESTE DEIN WISSEN

underinvestment problem

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as a consequence of dept outstandin, equity holders might prefer not to invest into projects if additional financing is required even though they have a positive NPV. The firm invest less than is efficient for all claimholders

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TESTE DEIN WISSEN

leftist divident theory

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TESTE DEIN WISSEN

companies should pay low/no divident bc

  • dividends ar taxed more than capital gains (not exactly the case in Germany)
  • cash should be retained or used to repurchase shares. 
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TESTE DEIN WISSEN

what is the normal term sructure of a bond and what does it mean?

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normally its upward sloping. the YTM is higher for mature bonds. But this does not make them more profitable automatically

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Rate of return rule

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TESTE DEIN WISSEN

accept investments that offer rates of return in excess of their opportunity cost of capital

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Expectation theory

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TESTE DEIN WISSEN

states: in equilibrium a series of short term bond offer the same expected return as an investment in a single long term maturity bond

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rate of return formula

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TESTE DEIN WISSEN

Return=profit/investment

profit=annualized captial gain + coupon payment

investment= average price of the bond


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TESTE DEIN WISSEN

why do buyers buy short time bonds?

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  • belive that short term rates will be higher in the future (expectation theory)
  • worry about the long term exposure to changes in interest rate ( duration explanation)
  • worry about rist of higher future infaltion (fisher theory)
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what measures the Duration of a bond

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the exposure of the bond's price to fluctuations in interest rates. It is the weighted average of the times when bond's cash payments are received

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Annual percentage rate

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Interest rate that is annualized using simple interest

r x 12

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Effective annual interest rate

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interest rate that is annualized using compound interest

((1+r)^12)-1

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Q:

the middle of the roaders theory

A:

divident policy is irrelevant- in a world without taxes, transaction costs or other market imperfections, supported by the modigliani and miller argument

Q:

Rightists divident theory

A:

companies should pay high divident bc humans are not rational optimizers and markets are not perfect. argument that: 

  • there is natural clientele (people that don't understand MM argument and need company to get cash), 
  • when paying out funds the cash can not be misused 
  •  dividends as signals (not really)
Q:

underinvestment problem

A:

as a consequence of dept outstandin, equity holders might prefer not to invest into projects if additional financing is required even though they have a positive NPV. The firm invest less than is efficient for all claimholders

Q:

leftist divident theory

A:

companies should pay low/no divident bc

  • dividends ar taxed more than capital gains (not exactly the case in Germany)
  • cash should be retained or used to repurchase shares. 
Q:

what is the normal term sructure of a bond and what does it mean?

A:

normally its upward sloping. the YTM is higher for mature bonds. But this does not make them more profitable automatically

Mehr Karteikarten anzeigen
Q:

Rate of return rule

A:

accept investments that offer rates of return in excess of their opportunity cost of capital

Q:

Expectation theory

A:

states: in equilibrium a series of short term bond offer the same expected return as an investment in a single long term maturity bond

Q:

rate of return formula

A:

Return=profit/investment

profit=annualized captial gain + coupon payment

investment= average price of the bond


Q:

why do buyers buy short time bonds?

A:
  • belive that short term rates will be higher in the future (expectation theory)
  • worry about the long term exposure to changes in interest rate ( duration explanation)
  • worry about rist of higher future infaltion (fisher theory)
Q:

what measures the Duration of a bond

A:

the exposure of the bond's price to fluctuations in interest rates. It is the weighted average of the times when bond's cash payments are received

Q:

Annual percentage rate

A:

Interest rate that is annualized using simple interest

r x 12

Q:

Effective annual interest rate

A:

interest rate that is annualized using compound interest

((1+r)^12)-1

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