­­­­FIN435 Class Web Page, Spring '18

Instructor: Maggie Foley

Jacksonville University

The Syllabus

Business Finance Online, an interactive learning tool for the Corporate Finance Student https://www.zenwealth.com/BusinessFinanceOnline/index.htm (could be very helpful)

 

Weekly SCHEDULE, LINKS, FILES and Questions 

Week

Coverage, HW, Supplements

-        Required

WSJ Papers for Discussion  in following week  

Videos (optional)

Week 1

Exit Exam Questions  

Marketwatch Game

Use the information and directions below to join the game.

1.     URL for your game: 
 http://www.marketwatch.com/game/fin435-18s

2.     Password for this private game: havefun.

3.     Click on the 'Join Now' button to get started.

4.     If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5.     Follow the instructions and start trading!

Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar

IPO schedule:  http://www.marketwatch.com/tools/ipo-calendar

 

 

How to evaluate a firm:

6 Signs a Business Has Bad Management | Phil Town (video)

For class discussion: What are the 6 signs? Which one is the hardest one to catch? Which one is the most important one?

 

 

Chapter 3  Financial Statement Analysis

Chapter 3 PPT

 

Using a Balance Sheet to Analyze a Company (VIDEO)

What is an Income Statement? (Video)

How Do You Read a Cash Flow Statement? | (VIDEO)

 

 

Chapter 3 Case study (first case study, due on 4/5)

 

Week one’s Class Videos (FYI)
Part 1

Part 2  

Part 3   

Part 4   

 

 

What is free cash flow (video)

 

 

image003.jpg

Capital expenditure = increases in NFA + depreciation

Or, capital expenditure = increases in GFA

 

All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. Q3: Free cash flow: concept and equation. What is FCF? Why is it important?

 

EDGAR online

http://www.sec.gov/edgar.shtml

Steps:

1.      Go to EDGAR online

2.      Search AAPL

3.      Search financial statement of AAPL in 2017, 2016, 2015, and 2014.

 

Chapter 4 Ratio Analysis

Chapter 4 PPT

Chapter 4 case study (second case study, due on 4/5)

Reference: Ratio Formulas

Reference: Commonly used ratio explained

 

HW of chapters 3, 4 (due on 4/5)

1. Firm A's sales last year = $280,000, net income = $23,000.  What was its profit margin? (8.21%)

2. Firm A’s total assets = $415,000 and its net income = $32,750.  What was its return on total assets (ROA)?(7.89%)

3. Firm A’s total common equity = $405,000 and its net income = $70,000.  What was its ROE? (17.28%)

4. Firm A’s stock price at the end of last year = $23.50 and its earnings per share for the year = $1.30.  What was its P/E ratio? (18.08)

5. Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000.  The new CFO wants to establish a debt/assets ratio of 55%.  The size of the firm does not change.  How much debt must the company add or subtract to achieve the target debt ratio? ($158,750)

6. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt).  Its sales for the last year were $595,000, and its net income was $25,000.  Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%.  What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? (9.45%)

7. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. What is the amount of the current assets? ($550)

8. Art's Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income? ( $39,600)

9. Use the following information to prepare the cash flow statement in 2008 of Nabors, Inc.  Calculate FCF.

 

image002.jpgimage003.jpg

Cash Flow Statement Partial Solution

Cash at the beginning of the year

310

Cash from operation

net income

Xxx

plus depreciation

Xxx

  -/+ AR 

Xxx

  -/+ Inventory

Xxx

 +/- AP

Xxx

net change in cash from operation

1075

Cash from investment

 -/+ (NFA+depreciation)

Xxx

net change in cash from investment

-1080

Cash from finaning

 +/- (long term debt+notes payable)

Xxx

 +/- common stock

Xxx

 - dividend

Xxx

net change in cash from investment

100

Total net change of cash

95

Cash at the end of the year

405

 

 

 

 

10. Read the following article. Summarize what is going on under each situation. Where are the auditors? Are they completely ineffective? Are they on the side with the employers? What is your view?

     sec_logitech.pdf (FYI)     sec_ener1.pdf (FYI)

 

SEC Announces Financial Fraud Cases

FOR IMMEDIATE RELEASE
2016-74

Washington D.C., April 19, 2016 — 

The Securities and Exchange Commission today announced a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.

In one case, technology manufacturer Logitech International agreed to pay a $7.5 million penalty for fraudulently inflating its fiscal year 2011 financial results to meet earnings guidance and committing other accounting-related violations during a five-year period.  Logitech’s then-controller Michael Doktorczyk and then-director of accounting Sherralyn Bolles agreed to pay penalties of $50,000 and $25,000, respectively, for violations related to Logitech’s warranty accrual accounting and failure to amortize intangibles from an earlier acquisition.  The SEC filed a complaint in federal court yesterday against Logitech’s then-chief financial officer Erik Bardman and then-acting controller Jennifer Wolf alleging that they deliberately minimized the write-down of millions of dollars of excess component parts for a product for which Logitech had excess inventory in FY11.  For Logitech’s financial statements, the two executives falsely assumed the company would build all of the components into finished products despite their knowledge of contrary facts and events. 

 In the other case, three then-executives at battery manufacturer Ener1 agreed to pay penalties for the company’s materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.  The financial misstatements stemmed from management’s failure to impair investments and receivables related to an electric car manufacturer that was one of its largest customers.  Former CEO and chairman of the board Charles L. Gassenheimer, former chief financial officer Jeffrey A. Seidel, and former chief accounting officer Robert R. Kamischke agreed to pay penalties of $100,000, $50,000, and $30,000, respectively.

 “We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “In these two cases, we allege deficiencies in Ener1’s failure to properly impair assets on its balance sheet and Logitech’s failure to write down the value of its inventory to avoid the financial consequences of disappointing sales.”

 In the Ener1 case, the SEC also found that Robert D. Hesselgesser, the engagement partner for PricewaterhouseCoopers LLP’s audit of Ener1’s 2010 financial statements, violated PCAOB and professional auditing standards when he failed to perform sufficient procedures to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.  Hesselgesser agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Hesselgesser to apply for reinstatement after two years.

“Auditors play a critical role regarding the accuracy of financial statements relied upon by investors, and they must be held accountable when they fail to do everything required under professional auditing standards,” said Michael Maloney, Chief Accountant of the SEC’s Division of Enforcement.

In the Logitech case, former CEO Gerald Quindlen was not accused of any misconduct, but has returned $194,487 in incentive-based compensation and stock sale profits received during the period of accounting violations, pursuant to Section 304(a) of the Sarbanes-Oxley Act.

 The companies and executives who agreed to settlements neither admitted nor denied the charges.

 The SEC’s investigation of Logitech was conducted by Paul Gunson and Matthew Finnegan, and supervised by Douglas McAllister.  The litigation is being led by Paul Kisslinger and Kevin Lombardi, and supervised by Bridget Fitzpatrick.

The SEC’s investigation of Ener1 was conducted by Carolyn Winters, Richard Haynes, and Deena Bernstein, and supervised by Douglas McAllister.  

Financial Statement Templates

Balance Sheet

Income Statement

Cash Flow Statement

 

 

Useful website for stock picks 

 

www.finviz.com (stock screener)

www.finance.yahoo.com

www.getaom.com

money.msn.com/investing

zacks.com

minyanville.com

moneychimp.com

navellier.investor.com/portfolio-grader/

nasdaq.com

marketwatch.com

superstockscreener.com

gurufocus.com

portfoliomoney.com

stockconsultant.com

marketgrader.com

moderngraham.com

stockpickr.com

stockta.com

thestreet.com

askstockguru.com

quotes.wsj.com

oldschoolvalue.com

fool.com

analystratings.com

barchart.com

stock2own.com

theonlineinvestor.com

seekingalpha.com

 

 

 

 

 

How the market works

Experts Explain: Financial Statements

 

 

WorldCom - What Went Wrong

 

 

How Did Enron Make Their Money, Hide Their Finances, Fail and Get Caught? Financial Reporting (2004)

 

 

 

The Crooked E – The Unshredded Truth about Enron (2003)

https://www.youtube.com/watch?v=aO0ZWsSBtco

 

 

The Billion Dollar Secret

 

The Zacks Rank Guide to Trading Success

 

Your career choices with a finance degree (Mutual Fund, Retail Banking, Investment Banking, Venture Capital, Hedge Fund, Private Banking…

University: management investment Co.

Retail banking

Venture Capital Explained

Understanding the role of a corporate and investment bank in financing the economy

 

Week 2, 3

Chapter 6 Interest rate

ppt

 

chapter 6 case study (third case study, due on 4/5)

 

Week 3’s Class videos:

Part I) https://youtu.be/cysbKa62X5Y

Part 2) https://youtu.be/w05Uo4VsOkc

Part 3) https://youtu.be/cvZ9X0xEDno

 

 

Part I: Yield Curve

 

Bond Yield and Performance At-A-Glance

Maturity

Yield %

1 Month

1.71

3 Month

1.74

6 Month

1.95

2 Year

2.31

5 Year

2.69

10 Year

2.89

30 Year

3.12

 

Yield Curve as of 3/21/2018

 

 

Market data website:

 http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data)

 

Market watch on Wall Street Journal has daily yield curve and interest rate information. 

http://www.marketwatch.com/tools/pftools/

https://www.youtube.com/watch?v=yph8TRldW6k


 

Summary of Yield Curve Shapes and Explanations

Normal Yield Curve
When bond investors expect the economy to hum along at normal rates of growth without significant changes in inflation rates or available capital, the yield curve slopes gently upward. In the absence of economic disruptions, investors who risk their money for longer periods expect to get a bigger reward — in the form of higher interest — than those who risk their money for shorter time periods. Thus, as maturities lengthen, interest rates get progressively higher and the curve goes up.

 

 

Steep Curve – Economy is improving
Typically the yield on 30-year Treasury bonds is three percentage points above the yield on three-month Treasury bills. When it gets wider than that — and the slope of the yield curve increases sharply — long-term bond holders are sending a message that they think the economy will improve quickly in the future.

 

 

 

Inverted Curve – Recession is coming
At first glance an inverted yield curve seems like a paradox. Why would long-term investors settle for lower yields while short-term investors take so much less risk? The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.

 

 


Flat or Humped Curve

To become inverted, the yield curve must pass through a period where long-term yields are the same as short-term rates. When that happens the shape will appear to be flat or, more commonly, a little raised in the middle.

Unfortunately, not all flat or humped curves turn into fully inverted curves. Otherwise we'd all get rich plunking our savings down on 30-year bonds the second we saw their yields start falling toward short-term levels.

On the other hand, you shouldn't discount a flat or humped curve just because it doesn't guarantee a coming recession. The odds are still pretty good that economic slowdown and lower interest rates will follow a period of flattening yields.

 

 

Part II: interest rate break down

Formula

r           = r* + IP + DRP + LP + MRP

            r           = required return on a debt security

            r*          = real risk-free rate of interest

            IP         = inflation premium

            DRP     = default risk premium

            LP        = liquidity premium

            MRP     = maturity risk premium

 image004.jpg

 

MRPt = 0.1% (t – 1)

DRPt  + LPt =  Corporate spread * (1.02)(t−1)

 

Homework of chapter 6 (Due on 4/5)

HW1  The following yields on U.S. Treasury securities were taken from a financial publication:

image002.jpg

  1. Plot a yield curve based on these data.
  2. Based on this yield curve, if you needed to borrow money for longer than 1 year, would it make sense for you to borrow short term and renew the loan or borrow long term? Explain.
  3. Calculate the 2 years interest rate 1 year from now, using the pure expectations theory.
  4. Calculate the 5 years interest rate 5 year from now, using the pure expectations theory.

 

 HW2 You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

    • Inflation premium = 3.25%
    • Liquidity premium = 0.6%
    • Maturity risk premium = 1.8%
    • Default risk premium = 2.15%

On the basis of these data, what is the real risk-free rate of return?  (answer: 2.25%)

 HW3 The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?(answer: 5%, 6.33%)

 HW4 A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?  (answer: 1.5%)

HW5 The real risk-free rate is 3%, and inflation is expected  to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security? (answer: 0.2%)

HW6 One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? (answer: 5.5%)

 

Federal Reserve raises interest rates to highest level since 2008 (Video)

 

For class discussion: why now?

 

 

US STOCKS-Wall St sinks on Trump tariffs, interest rate worries

Published 1:35 PM ET Thu, 1 March 2018 Reuters

 

By Sruthi Shankar and Caroline Valetkevitch

March 1 (Reuters) - U.S. stocks fell sharply on Thursday after President Donald Trump said the United States would impose import tariffs on steel and aluminum, adding fears of a tit-for-tat trade war to growing worries about higher interest rates.

After a confused day of report and counter report, Trump said the U.S. would impose tariffs of 25 percent on steel imports and 10 percent on imported aluminum next week.

That drove shares in U.S. steel producers as much as 12 percent higher but knocked 2 percent or more off heavyweights like Boeing and Caterpillar, who investors worried would face higher raw material costs and trade barriers elsewhere.

New York Federal Reserve President William Dudley also added to the evidence that the U.S. central bank under new chief Jerome Powell would seek to tighten monetary policy with four interest rates rises this year, more than previously expected.

By 13:09 p.m. ET, all the major sectors in the S&P 500 were down in response along with 29 of the 30 components of the Dow Industrial Average.

Overall the Dow lost 343.7 points, or 1.4 percent, the S&P 500 29.03 points, or 1.1 percent and the Nasdaq Composite 77.10 points, or 1.1 percent.

"The bombshell is the announcement about half an hour ago about the proposed tariffs on steel and aluminum industries," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

"It's helping about a dozen stocks in those industries but has raised the specter of trade wars, and trade wars don't help the stock market."

Federal Reserve chair Jerome Powell had earlier given the market a boost by saying in his second round of congressional testimony that the central bank did not see strong evidence of wage inflation or signs of overheating.

Rising inflation and bond yields were the main concerns as Wall Street ended a turbulent February on Wednesday, with the S&P 500 posting its first monthly loss in 11 months.

But it was the tariff issues that was spinning the market lower as the afternoon wore on.

"The risk to imparting these tariffs is that it invites a retaliatory response from our trading partners and particularly China," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. (Additional reporting by Parikshit Mishra in Bengaluru Editing by Patrick Graham)

 

https://www.cnbc.com/2018/03/01/reuters-america-us-stocks-wall-st-sinks-on-trump-tariffs-interest-rate-worries.html

 

Questions for discussion: Do you like this round of tariff war?  Worry for inflation? 

 

 

 

 

As the Tariff Drama Ends, Interest Rates Take Center Stage (FYI)

By JAMES "REV SHARK" DEPORRE

 | MAR 09, 2018 | 7:53 AM EST

"Strategy requires thought, tactics require observation." - Max Euwe

 

After a week of choppy action following the announcement of steel and aluminum tariffs by President Trump, the market is resting and trying to determine its next move. The tariff issue isn't over, but Trump backed off from his original harsh position and the market is now higher than when the announcement was first made.

The most notable aspect of the recent trading has been the tenacious dip buying. Market players could hardly wait to plunge in and buy weakness. There was no real fear or worry despite breathless commentary by many pundits about how Trump was creating an economic disaster.

There will be some reverberations as the focus moves to the NAFTA negotiations and possible carve outs for other allies but the market seems ready to dismiss the issue and look ahead to other matters.

The other matters start with news the President Trump will meet with North Korea's Kim Jung Un. Asian markets rallied on this news, but it is having little impact in Europe and the US so far. Understandably, there is plenty of skepticism about the sincerity of this approach but it is an interesting development that does help to ease some concerns.

The more important issue for the market today is likely to be the jobs report that is due at 8.30 am ET. The market has put interest rates on the back burner while it has dealt with the tariff and trade war issues. Bonds have been holding steady since the Jerome Powell Congressional testimony but jobs news has the capacity to heat things up again.

Before the tariff news hit, the market was selling off on hawkish comments by Powell. The expections for interest hikes this year has been increasing but the market hasn't been too concerned about that issue. It was far more worried about playing the 'buy the dip' game on tariff news.

Technically the indices are facing overhead resistance here. Things are slightly overbought after the bounce off the tariff lows and there is resistance around the 50-day simple moving average of the S&P500 at 2740.

The Nasdaq has been outperforming but that momentum slowed a bit as the January highs are lurking. Small caps have been a safe haven during the recent drama but it is increasingly difficult to find setups after a V-shaped move.

Prior to the short volatility blow-up at the beginning of February, the market had little worry or concern about technical overhead. It simply didn't matter as V-shaped bounces powered through the obvious levels. That has changed with two big dips in the past month. The endless upside is not quite as easy as it once appeared. While we still have V-ish inclinations, there is now greater appreciation of the potential for some downside.

I'm holding about 50% cash and have not been finding much to buy the last few days. I'll continue to look for new merchandise but I expect I'll have to be patient while the market figures out what it is going to do next.

We have a flattish open on the way and lots of talk about North Korea which isn't moving the market much. Jobs news is next.

What is interest rates

https://www.youtube.com/watch?v=Pod73wrvdSQ

 

 

Gerald Celente: Low Interest Rates are Building the Biggest Bubble in Modern History - 9/21/14

https://www.youtube.com/watch?v=pTpK6Te6tYI

 

 

 

 

How interest rates are set

https://www.youtube.com/watch?v=Oz5hNemSdWc

 

 

 

 

What happens if Fed raise interest rates

 

https://www.youtube.com/watch?v=4OP-3Ui6K1s

 

Week 4

Mid Term (week four, take home, due on 4/5/2018)

 

On blackboard under course introduction!

 

Week 4

Chapter 7 Bond Pricing

 

ppt

 

Case study of chapter 7 (Due on 4/5)

 

Week 4’s class videos

Part 1 -  https://youtu.be/E60i2CxlmnU

Part 2 -  https://youtu.be/Ey1jDrs1mXs

Part 3 -  https://youtu.be/MgRvp4Y-yaQ

 

 

Market data website:

1.   FINRA

      http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data)

2.      WSJ

Market watch on Wall Street Journal has daily yield curve and bond yield information. 

http://www.marketwatch.com/tools/pftools/

https://www.youtube.com/watch?v=yph8TRldW6k

3.      Bond Online

http://www.bondsonline.com/Todays_Market/

 

 

 

Simplified Balance Sheet of WalMart

 

In Millions of USD 

As of 2017-01-31

Total Assets

198,825.00

Total Current Liabilities

66,928.00

Long Term Debt

42,018.00

Total Liabilities

121,027.00

Total Equity

77,798.00

Total Liabilities & Shareholders' Equity

198,825.00

 

For discussion:

·         What is this long term debt?

·         Who is the lender of this long term debt?

So this long term debt is called bond in the financial market. Where can you find the pricing information and other specifications of the bond issued by WMT?

image004.jpg 

 

Investing Basics: Bonds(video)

 

 

FINR-A Bond market information

 http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

 

How Bonds Work (video)

Investing Basics: Bonds(video)

 

FINRA – Bond market information

 http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

WAL-MART STORES INC

http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP

 

Coupon Rate

7.550

%

Maturity Date

02/15/2030

Symbol

WMT.GP

CUSIP

931142BF9

Next Call Date

Callable

Last Trade Price

$145.07

Last Trade Yield

3.104%

Last Trade Date

11/06/2017

US Treasury Yield

 

Trade History

Credit and Rating Elements

Moody's® Rating

Aa2 (10/14/2015)

Standard & Poor's Rating

AA (02/10/2000)

TRACE Grade

Investment Grade

Default

Bankruptcy

N

Insurance

Mortgage Insurer

Pre-Refunded/Escrowed

Additional Description

Senior Unsecured Note

Classification Elements

Bond Type

US Corporate Debentures

Debt Type

Senior Unsecured Note

Industry Group

Industrial

Industry Sub Group

Retail

Sub-Product Asset

CORP

Sub-Product Asset Type

Corporate Bond

State

Use of Proceeds

Security Code

Special Characteristics

Medium Term Note

N

Issue Elements

*dollar amount in thousands

Offering Date

02/09/2000

Dated Date

02/15/2000

First Coupon Date

08/15/2000

Original Offering*

$1,000,000.00

Amount Outstanding*

$1,000,000.00

Series

Issue Description

Project Name

Payment Frequency

Semi-Annual

Day Count

30/360

Form

Book Entry

Depository/Registration

Depository Trust Company

Security Level

Senior

Collateral Pledge

Capital Purpose

Bond Elements

*dollar amount in thousands

Original Maturity Size*

1,000,000.00

Amount Outstanding Size*

1,000,000.00

Yield at Offering

7.56%

Price at Offering

$99.84

Coupon Type

Fixed

Escrow Type

 

 

Study guide  

1.      Find bond sponsored by WalMart (WMT)

just go to www.finra.orgè Investor center è market data è bond è corporate bond

 

Corporate Bond

 

Issuer Name

Symbol

Callable

Sub-Product Type

Coupon

Maturity

Moody's®

S&P

Price

Yield

WMT

WMT.GP

Corporate Bond

7.55

2/15/2030

Aa2

AA

138.694

3.537

WMT

WMT.GG

Corporate Bond

6.75

10/15/2023

Aa2

AA

118.23

3.153

WMT

WMT.HV

 

Corporate Bond

5.25

9/1/2035

Aa2

AA

118.14

WMT

WMT.IA

Corporate Bond

5.875

4/5/2027

Aa2

AA

118.54

WMT

WMT.IC

No

Corporate Bond

6.5

8/15/2037

Aa2

AA

138.098

WMT

WMT.IE

No

Corporate Bond

6.2

4/15/2038

Aa2

AA

132.478

WMT

WMT.IG

No

Corporate Bond

4.125

2/1/2019

Aa2

AA

100.84

WMT

WMT.IJ

Corporate Bond

5.625

4/1/2040

Aa2

AA

126.384

WMT

WMT.IK

No

Corporate Bond

3.625

7/8/2020

Aa2

AA

101.75

WMT

WMT.IM

No

Corporate Bond

4.875

7/8/2040

Aa2

AA

115.825

WMT

WMT.IP

Corporate Bond

3.25

10/25/2020

Aa2

AA

101.37

2.698

WMT

WMT.IQ

Corporate Bond

5

10/25/2040

Aa2

AA

116.064

WMT

WMT.AD

No

Corporate Bond

4.25

4/15/2021

Aa2

AA

104.306

2.774

WMT

WMT.AB

No

Corporate Bond

5.625

4/15/2041

Aa2

AA

127.844

WMT

WMT4117477

Yes

Corporate Bond

3.3

4/22/2024

Aa2

AA

100.41

3.223

WMT

WMT4117478

Yes

Corporate Bond

4.3

4/22/2044

Aa2

AA

106.654

WMT

WMT3991377

Yes

Corporate Bond

4

4/11/2043

Aa2

AA

102.849

WMT

WMT3991489

Corporate Bond

1.125

4/11/2018

Aa2

AA

99.918

2.667

WMT

WMT3991485

Yes

Corporate Bond

2.55

4/11/2023

Aa2

AA

97.487

3.091

WMT

WMT4055335

Corporate Bond

1.95

12/15/2018

Aa2

AA

99.715

2.344

 

 

For class discussion:

·                     Fed has hiked interest rates. So, shall you invest in short term bond or long term bond?

·                     Which of the three WMT bonds are the most attractive one to you? Why?

·                     Referring to the price chart of the above bond below, the price was reaching peak in the middle of 2016 and 2012. Why? The price was really low in the middle of 2013. Why? Interest rate is not the reason.  

 

http://markets.businessinsider.com/bonds/7_550-walmart-bond-2030-us931142bf98

 

 

HOMEWORK (Due o n 4/5)

 

1.                  AAA firm’ bonds will mature in eight years, and coupon is $65. YTM is 8.2%. Bond’s market value? ($903.04)

2.                  AAA firm’s bonds’ market value is $1,120, with 15 years maturity and coupon of $85. What is YTM?  (7.17%)

3.         AAA firm’ bonds market value is $1,050, with six years to maturity and coupon of $75. Current yield?   (7.14%)

4.         Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000.  They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100.  What is their yield to call (YTC)? (7.74%)

5.         Malko Enterprises’ bonds currently sell for $1,050.  They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000.  What is their current yield? (7.14%)

6.         Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%.  The bond has a face value of $1,000, and it makes semiannual interest payments.  If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? ($1,105.69)

 7.        Grossnickle Corporation issued 20-year, non-callable, 7.5% annual coupon bonds at their par value of $1,000 one year ago.  Today, the market interest rate on these bonds is 5.5%.  What is the current price of the bonds, given that they now have 19 years to maturity? ($1,232.15)

 8.        McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.  Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.  What is the difference between this bond's YTM and its YTC?  (Subtract the YTC from the YTM; it is possible to get a negative answer.) (2.62%)

9.         Taussig Corp.'s bonds currently sell for $1,150.  They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50.  Assume that n*o costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.  Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? (4.2%)

10.       A 25-year, $1,000 par value bond has an 8.5% annual payment coupon.  The bond currently sells for $925.  If the yield to maturity remains at its current rate, what will the price be 5 years from now? ($930.11)

11. Do a simple study on IHRT. Do you think that over borrowing is the major cause for its failure? You can use finviz.com to gather information. Between 200 – 500 words.

Bond Pricing Formula (FYI)

 

image033.jpg

 

 

 image035.jpg

 

 

 

image036.jpg

 

image037.jpg

   

image038.jpg

 

 

 Bond Pricing Excel Formula

 

To calculate bond price  in EXCEL (annual coupon bond):

Price=abs(pv(yield to maturity, years left to maturity, coupon rate*1000, 1000)

 

To calculate yield to maturity (annual coupon bond)::

Yield to maturity = rate(years left to maturity, coupon rate *1000, -price, 1000)

 

To calculate bond price (semi-annual coupon bond):

Price=abs(pv(yield to maturity/2, years left to maturity*2, coupon rate*1000/2, 1000)

 

To calculate yield to maturity (semi-annual coupon bond):

Yield to maturity = rate(years left to maturity*2, coupon rate *1000/2, -price, 1000)*2

 

 

Bond calculation  (Thanks to Dr. Lane)

image027.jpg


The Bond Calculator can be used to Price Bonds and to determine the Yield-to-Maturity and Yield-to-Call on Bonds. It works similarly to the Time Value Of Money functions of the Texas Instruments BA II Plus calculator.

  1. Bond Price Field - The Price of the bond is displayed or entered in this field.
  2. Coupon Field - The Coupon Payment is displayed or entered in this field. For a Semiannual Coupon Bond the amount displayed or entered is the semiannual Coupon Payment.
  3. Face Value Field - The Face Value or Principal of the bond is displayed or entered in this field.
  4. Yield Field - The Bond Yield is displayed or entered in this field.
  5. Periods Field - The number of Periods remaining until maturity is displayed or entered in this field. For a Semiannual Coupon Bond, this represents the number of six month periods remaining until maturity, i.e., the number of years remaining times two.
  6. Compounding Field - The value selected in this pop-up represents the compounding frequency for the Bond Yield and the frequency of the Coupon Payments, i.e., whether the bond is a Semiannual or Annual Coupon Bond.
  7. Buttons - Press these buttons to calculate the corresponding value.
    • Price Button - Press to calculate the Bond Price.
    • Coupon Button - Press to calculate the Coupon Payment.
    • Face Value Button - Press to calculate the Face Value.
    • Yield Button - Press to calculate the Bond Yield.
    • Periods Button - Press to calculate the Number of Periods remaining until Maturity.

FYI:http://finra-markets.morningstar.com/BondCenter/TRACEMarketAggregateStats.jsp

Most Active Investment Grade Bonds

Issuer Name

Symbol

Coupon

Maturity

Moody’s®/S&P

High

Low

Last

Change

Yield%

AT&T INC

T4525196

2.850%

02/14/2023

Baa1/BBB+

100.09900

99.64600

100.04500

0.295000

2.839707

AT&T INC

T4525198

3.900%

08/14/2027

Baa1/BBB+

100.29600

99.64537

100.25000

-0.029000

3.867290

AT&T INC

T4525199

4.900%

08/14/2037

Baa1/BBB+

100.58400

98.86400

100.25000

-1.150000

4.879186

CVS HEALTH CORP

CVS4607884

4.780%

03/25/2038

Baa1/BBB

101.11900

98.90300

99.37100

0.329000

4.829014

AT&T INC

T4525197

3.400%

08/14/2024

Baa1/BBB+

100.30000

100.03600

100.23200

-0.017000

3.358417

CVS HEALTH CORP

CVS4608029

3.700%

03/09/2023

Baa1/BBB

100.79570

98.37800

99.40800

-0.004000

3.832083

WELLS FARGO & CO NEW MEDIUM TERM SR NTS

WFC4160708

3.300%

09/09/2024

A2/A-

98.45200

96.18500

96.91300

-0.183000

3.843921

CVS HEALTH CORP

CVS4607885

5.050%

03/25/2048

Baa1/BBB

102.45221

101.82400

102.43300

0.110000

4.892994

CVS HEALTH CORP

CVS4608028

4.300%

03/25/2028

Baa1/BBB

100.87800

98.09300

100.00000

1.093000

4.299527

VERIZON COMMUNICATIONS INC

VZ4388862

4.125%

08/15/2046

Baa1/BBB+

88.60800

87.23900

88.60800

0.442000

4.869433

Most Active High Yield Bonds

Issuer Name

Symbol

Coupon

Maturity

Moody’s®/S&P

High

Low

Last

Change

Yield%

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612344

4.600%

04/15/2048

/

101.01800

99.43400

100.45000

0.355000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612348

4.000%

04/13/2028

/

100.77100

99.21600

99.76200

0.318000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612345

4.375%

04/15/2038

/

99.90600

98.55500

99.90600

0.816000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612346

4.750%

04/15/2058

/

100.30600

99.37700

99.78400

0.212000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612177

3.500%

01/12/2024

/

100.50800

99.50700

99.78100

0.155000

DELL INC

DELL.GK

5.875%

06/15/2019

Ba2/BB-

103.62400

101.75000

101.75000

-0.875000

4.388649

SLM CORP MEDIUM TERM NTS BOOK ENTRY

NAVI4051910

5.500%

01/15/2019

Ba3/B+

101.77100

100.18600

100.18600

-0.908000

5.252094

IHEARTCOMMUNICATIONS INC

IHRT4275629

10.625%

03/15/2023

Caa2/D

80.12500

79.87500

80.00000

-0.250000

CENOVUS ENERGY INC

CVE4481641

4.250%

04/15/2027

Ba2/

96.98200

96.52200

96.89600

0.152000

4.673772

CHS / CMNTY HEALTH SYS INC

CYH4464595

6.250%

03/31/2023

B2/B-

93.07500

91.93750

92.00000

-2.350000

8.226991

 

IHEARTCOMMUNICATIONS INC

+ ADD TO WATCHLIST

Coupon Rate

10.625

%

Maturity Date

03/15/2023

Symbol

IHRT4275629

CUSIP

45174HAC1

Next Call Date

03/15/2019

Callable

Yes

Last Trade Price

$78.47

Last Trade Yield

Last Trade Date

03/29/2018

US Treasury Yield

 

Trade History

Prospectus

 

Classification Elements

Bond Type

US Corporate Debentures

Debt Type

Senior Secured Note

Industry Group

Industrial

Industry Sub Group

Media/Communications

Sub-Product Asset

CORP

Sub-Product Asset Type

Corporate Bond

State

Use of Proceeds

Security Code

Special Characteristics

Medium Term Note

N

Issue Elements

*dollar amount in thousands

Offering Date

07/07/2015

Dated Date

03/15/2015

First Coupon Date

09/15/2015

Original Offering*

$950,000.00

Amount Outstanding*

$950,000.00

Series

Issue Description

Project Name

Payment Frequency

Semi-Annual

Day Count

30/360

Form

Book Entry

Depository/Registration

Depository Trust Company

Security Level

Senior

Collateral Pledge

Capital Purpose

Bond Elements

*dollar amount in thousands

Original Maturity Size*

950,000.00

Amount Outstanding Size*

950,000.00

Yield at Offering

Price at Offering

Coupon Type

Fixed

Escrow Type

 

 

Credit and Rating Elements

Moody's® Rating

Caa2 (03/15/2018)

Standard & Poor's Rating

D (03/15/2018)

TRACE Grade

High Yield

Default

Bankruptcy

Y

Insurance

Mortgage Insurer

Pre-Refunded/Escrowed

Additional Description

Senior Secured Note

Put & Redemption Provisions

Call Date            Call price

03/15/2019         $105.31

iHeartCommunications misses $106 million interest payment on bonds due 2021

Published: Feb 1, 2018 10:53 a.m. ET

 2

CIARALINNANE

 

CORPORATE NEWS EDITOR, MarketWatch.com
https://www.marketwatch.com/story/iheartcommunications-misses-106-million-interest-payment-on-bonds-due-2021-2018-02-01

 

iHeartCommunications Inc., which is owned by radio station operator iHeartMedia Inc. IHRT, -9.23% said Thursday its board has decided not to make a $106 million interest payment on 14% senior notes that mature in 2021 as it continues to hold talks with creditors on a debt restructuring. The company will make use of a 30-day grace period under the terms of its borrowing. "The board is considering options as part of its strategy to achieve a comprehensive restructuring of the company's debt," it said in a statement. The notes were trading at 7.50 cents on the dollar, according to trading platform MarketAxess.

 

IHRT Stock Price  https://finance.yahoo.com/quote/ihrt?ltr=1

 

0.52+0.04 (+21.87%)

At close: March 15 3:59PM EDT

Previous Close

0.48

Open

0.00

Bid

0.00 x 0

Ask

0.00 x 0

Volume

0

Avg. Volume

44,579

Market Cap

47.576M

Beta

-0.30

PE Ratio (TTM)

N/A

EPS (TTM)

-8.30

Earnings Date

Mar 29, 2018 - Apr 3, 2018

Forward Dividend & Yield

N/A (N/A)

1y Target Est

10.00

 

 

 

For class discussion: How much is the yield to maturity to IHEARTCOMMUNICATION Inc’s bond?

High yield bond is riskier than stocks in general ? Or not?

 

Low default rates bode well for high yield in 2018 (video)

Guggenheim's Minerd Says It's Time to Get Out of High-Yield Debt (video)

 

 

 

 

 

Treasury Bond Auction Website

http://www.treasurydirect.gov

 

 

What is duration? (not required but useful)

Duration is defined as the weighted average of the present value of the cash flows and is used as a measure of a bond price's response to changes in yield.

If duration = 10 years, then for 1% increase in interest rate, the bond price will drop by 10 times of 1%, which is 10%.

You can calculate duration in excel.

Syntax

DURATION(settlement, maturity, coupon, yld, frequency, [basis])

 

Bond Duration Video

https://www.youtube.com/watch?v=9HFLGNaEWl8

 

 

 

How to calculate bond prices using exact

date? (not required but useful)

 

Use price function in Excel. Returns the price

 per $100 face value of a security that pays periodic interest.

Syntax

PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis])

 

Excel How to use the PRICE formula video

https://www.youtube.com/watch?v=4UzFPKv2Tnw

 

 

 

Calculate bond yield using exact date?(not required but useful)

 

Use YIELD to calculate bond yield.

Syntax

YIELD(settlement,maturity,rate,pr,

redemption, frequency, basis)

Excel yield function video

https://www.youtube.com/watch?v=vi27yLPgwZc

 

 

 

Risk of Bonds

Bond risk (video)

Bond risk – credit risk (video)

Bond risk – interest rate risk (video)

 

 

 

How to invest in bond market when Fed is hiking interest rates? (Videos)

 

Is The 35-Year Bull Market In Bonds Dead? The ‘Godfather of Bonds’ Gary Shilling Responds

 

 How To Invest in Bonds When Rates Are Rising?

 

  Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low? 

 

 

Week 5

Chapter 8 Risk and Return

ppt

 

Week 5’s class videos

Part 1 -  https://youtu.be/twujv8QQTbc

Part 2 -  https://youtu.be/OFctf09sHRQ

Part 3 -  https://youtu.be/qM2H0o5mLFs

 

 

 

 

Chapter 8 case study (due on final date)

 

Summary of the steps in the case study:

1st, calculate expected return based on probabilities and corresponding returns

2nd, calculate standard deviation based  on probabilities and corresponding returns

3rd,  calculate expected return and standard deviation based on probabilities historical returns

4th, Use corr function to calculate correlation based on two stocks’ historical returns.

5th, Understand the concept of correlation and can pick stocks based on correlations

6th,understand what is beta and can calculate beta using slope function

7th, can use CAMP to calculate stock returns.

 

Homework of Chapter 8 (due on final date)

 

1.      An investor currently holds the following portfolio: He invested 30% of the fund in Apple with Beta equal 1.1. He also invested 40% in GE with Beta equal 1.6. The rest of his fund goes to Ford, with Beta equal 2.2. Use the above information to answer the following questions.

1)      The beta for the portfolio is? (1.63)

2)      The three month Treasury bill rate (this is risk free rate) is 2%. S&P500 index return is 10% (this is market return).  Now calculate the portfolio’s return.  15.04%

 

 

Refer to the following graph. The three month Treasury bill rate (this is risk free rate) is 2%. S&P500 index return is 10% (this is market return). 

image045.jpg

 

2.  What is the value of A?  2%

3. What is the value of B? 10%

4. How much is the slope of the above security market line? 8%

5. Your uncle bought Apple in January, year 2000 for $30. The current price of Apple is $480 per share. Assume there are no dividend ever paid. Calculate your uncle’s holding period return.  15 times

6. Your current portfolio’s BETA is about 1.2. Your total investment is worth around $200,000. You uncle just gave you $100,000 to invest for him. With this $100,000 extra funds in hand, you plan to invest the whole $100,000 in additional stocks to increase your whole portfolio’s BETA to 1.5 (Your portfolio now worth $200,000 plus $100,000). What is the average BETA of the new stocks to achieve your goal? (hint: write down the equation of the portfolio’s Beta first) 2.10

7.

                                           Years                  Market r                Stock A                 Stock B

                                               1                               3%                      16%                         5%

                                               2                             -5%                      20%                         5%

                                               3                               1%                      18%                         5%

                                               4                           -10%                      25%                         5%

                                               5                               6%                      14%                         5%

                                               

·         Calculate the average returns of the market r and stock A and stock B. (Answer: -1%, 18.6%, 5%)

·         Calculate the standard deviations of the market, stock A, & stock B (Answer: 6.44%, 4.21%;  0 )

·         Calculate the correlation of stock market r and stock a. (Answer: -0.98)

·         Assume you invest 50% in stock A and 50% in stock B. Calculate the average return and the standard deviation of the portfolio. (Answer: 11.8%; 2.11%)

Calculate beta of stock A and beta of stock B, respectively (Answer: -0.64, 0)

 

 

 

 Chapter 9 Stock Return Evaluation

ppt

 

Stock screening tools

 

·         Reuters stock screener to help select stocks

http://stockscreener.us.reuters.com/Stock/US/

 

·         FINVIZ.com

http://finviz.com/screener.ashx

 

·         WSJ stock screen

http://online.wsj.com/public/quotes/stock_screener.html

 

·         Simply the Web's Best Financial Charts

 Stock charts

 

 

MSN Money

You can find analyst rating from MSN money

For instance,

ANALYSTS RATINGS

Zacks average brokerage recommendation is Moderate Buy

RECOMMENDATIONS

CURRENT

1 MONTH AGO

2 MONTHS AGO

3 MONTHS AGO

Strong Buy

26

26

25

24

Moderate Buy

4

4

4

4

Hold

8

8

8

9

Moderate Sell

0

0

0

0

Strong Sell

0

0

0

0

Mean Rec.

1.51

1.51

1.53

1.58

 

How to pick stocks

Capital Asset Pricing Model (CAPM)Explained

https://www.youtube.com/watch?v=JApBhv3VLTo

 

Ranking stocks using PEG ratio

https://www.youtube.com/watch?v=bekW_hTehNU

 

Summary of stock screening rules from class discussion

PEG<1

PE<15  (? FB’s PE>100?)

Growth rate<20

ROE>10%

Analyst ranking: strong buy only

Zacks average =1 (from Ranking stocks using PEG ratio)

current price>5

 

 

 

Useful website (recommended by David and Phil. Thanks, David and Phil)

 FYI (Based on lecture by David and Phil’ Video here)

www.finance.yahoo.com

www.finviz.com

www.getaom.com

money.msn.com/investing

zacks.com

minyanville.com

moneychimp.com

navellier.investor.com/portfolio-grader/

nasdaq.com

marketwatch.com

superstockscreener.com

gurufocus.com

portfoliomoney.com

stockconsultant.com

marketgrader.com

moderngraham.com

stockpickr.com

stockta.com

thestreet.com

askstockguru.com

quotes.wsj.com

oldschoolvalue.com

fool.com

analystratings.com

barchart.com

stock2own.com

theonlineinvestor.com

seekingalpha.com

 

Homework (no homework for this chapter):

 

 

 

CAPM Calculator

(Thanks TO Dr. Lane)

CAPM Calculator: Introduction (www.zenwealth.com)

image028.jpg

The CAPM Calculator can be used to solve problems based upon the Security Market Line (SML) from the Capital Asset Pricing Model. The calculator is able to solve for any of the four possible variables given the value of the other three variables.

1.     Expected Return on Stock i Field - The Expected Return on Stock i is displayed or entered in this field.

2.     Risk Free Rate Field - The Risk Free Rate is displayed or entered in this field.

3.     Expected Return on the Market Field - The Expected Return on the Market Portfolio is displayed or entered in this field.

4.     Beta for Stock i Field - The Beta for Stock i is displayed or entered in this field.

5.     Buttons - Press these buttons to calculate the corresponding value.

o    E[Ri] Button - Press to calculate the Expected Return on Asset i.

o    Rf Button - Press to calculate the Risk Free Rate.

o    E[Rm] Button - Press to calculate the Expected Return on the Market Portfolio.

o    Beta Button - Press to calculate the Beta for Asset i.

(from zenwealth.com)

 

 

Expected return Calculator

Thanks to Dr. Lane

https://www.zenwealth.com/BusinessFinanceOnline/RR/images/ExpectedReturnCalculator.gif

The Expected Return Calculator calculates the Expected Return, Variance, Standard Deviation, Covariance, and Correlation Coefficient for a probability distribution of asset returns.

1.     Input Fields - Enter the Probability, Return on Stock 1, and Return on Stock2 for each state in these fields. The sum of the probabilities must equal 100%.

2.     Expected Return Fields - The Expected Returns on Stocks 1 and 2 are displayed here.

3.     Variance Fields - The Variance of the returns on Stocks 1 and 2 are displayed here.

4.     Standard Deviation Fields - The Standard Deviation of the returns on Stocks 1 and 2 are displayed here.

5.     Covariance Field - The Covariance between the returns on Stocks 1 and 2 is displayed here.