Second Mid-term exam

1. Determinants of interest rates
   1. Opportunity cost
   2. The relationship between bond ratings and interest rates
   3. The basis for the various premiums layered on the real risk-free rate for default, inflation,  maturity and liquidity
   4. The term structure of interest rates

1. Bond valuation
   1. Vocabulary (par, coupon, etc...)
   2. Cash flow patterns of bonds
   3. Present value of a bond and its relationship to interest rates: i.e. when does it trade at a discount or a premium?
   4. Yield to maturity versus yield to call - how to calculate
   5. Adjustments to present value formulas for semi-annual payments
   6. Convergence of bonds sold at a premium or a discount to par at maturity
   7. The risks of investing in bonds: price, reinvestment, default
   8. The role of the bond rating agencies

1. Risk and return
   1. Defining a risk free asset versus a risky asset
   2. Risk as defined by standard deviation, coefficient of variation

A focus on how to interpret this information - not on how to calculate it

What is risk aversion?

1. 1. Diversifiable versus market risk

The benefits of diversification and the significance of asset correlation

1. Stock valuation
   1. The components of the return on equity

Dividend yield and capital gains add up to a stock's total returnDividend discount models - using perpetuity present value formulas with and without growth