Convertible bond
- Convertible bond:
- yields interest payments, but can be converted into a predetermined number of common stock
- can be done at certain times during the bond’s life
- Warrants:
- Similar to options, but generally issued by company itself, not a third party, and traded over-the-counter more often than on an exchange
- Investors cannot write warrants like they can options
- Unlike options, warrants are dilutive
Types Of Warrants
- Traditional warrants: Issued with bonds (warrant-linked bonds), as a sweetener - are often detachable, can also be issued in conjunction with preferred stock
- Wedded or wedding warrants are not detachable, and the investor must surrender the bond or preferred stock the warrant is “wedded” to in order to exercise it
- Covered warrants are issued by financial institutions rather than companies, so no new stock is issued when covered warrants are exercised.
Black-Scholes model
- 5 input variables: strike price of an option, current stock price, time to expiration, risk-free rate, and volatility
- Standard BSM model only used for European options, as American options could be exercised before the expiration date
- Developed in 1973 by Fischer Black, Robert Merton, and Myron Scholes
- Black-Scholes Assumptions: No dividends, markets are random, no transaction costs and rf rate & volatility are known and constant
Debenture
- Type of bond or other debt instrument that is unsecured by collateral
- Rely on the creditworthiness and reputation of the issuer for support
- Used by corporations and governments and usually has a term greater than 10 years
Price to Tangible Book Value (PTBV)
The tangible book value number includes all physical assets but excludes intangible assets such as goodwill, patents, intellectual property, and trademarks.
Capitalization rate
The capitalization rate is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor’s potential return on a real estate investment.
Zero-beta portfolio
A zero-beta portfolio is a portfolio constructed to have zero systematic risk, or in other words, a beta of zero. A zero-beta portfolio would have the same expected return as the risk-free rate.
Investment vs Associate vs Subsidiary
