Financial Analysis & Derivatives Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Financial Analysis & Derivatives flashcards as text
What does 'yield to maturity' (YTM) represent for a bond?
Answer: The total return anticipated on a bond if held until maturity, assuming all coupons are reinvested at the same rate
YTM is the internal rate of return of a bond — the discount rate that equates the present value of all future coupon payments and principal repayment to the bond's current market price. It reflects the total expected return if the bond is held to maturity and coupons are reinvested at the YTM.
What is the 'credit spread' on a corporate bond?
Answer: The additional yield a corporate bond pays over a comparable maturity government bond, compensating for credit risk
The credit spread is the yield difference between a corporate bond and a comparable government bond (e.g., gilt). It compensates investors for the additional credit risk (default risk) of the corporate issuer compared to the government, which is assumed to be risk-free.
What is the 'dividend discount model' (DDM) used for?
Answer: Valuing a company's shares based on the present value of expected future dividend payments
The DDM values a share as the present value of all future expected dividends, discounted at the required rate of return. The Gordon Growth Model simplifies this: Price = D1 / (r - g), where D1 is next year's dividend, r is required return, and g is the sustainable dividend growth rate.
What is 'price-to-book' (P/B) ratio and when is it most commonly used?
Answer: The ratio of market capitalisation to net asset value (book value), commonly used for financial sector companies and asset-heavy industries
P/B ratio = Market Cap / Net Book Value (shareholders' equity). It measures the premium or discount investors pay relative to the accounting value of assets. It is widely used for banks (where assets are largely financial and book value is meaningful) and capital-intensive industries.
What is the 'enterprise value' (EV) of a company?
Answer: The total value of a company including equity market cap plus net debt (debt minus cash), representing the total cost to an acquirer
Enterprise Value = Market Cap + Net Debt (total debt minus cash). EV represents the total value of a business to all capital providers (equity and debt holders) and is the theoretical acquisition price. EV-based ratios (EV/EBITDA) enable comparison across companies with different capital structures.
What is 'EBITDA' and why is it commonly used in financial analysis?
Answer: Earnings Before Interest, Tax, Depreciation and Amortisation — a proxy for operating cash generation used to compare companies across different capital structures and tax regimes
EBITDA strips out interest (financing differences), tax (jurisdiction differences), depreciation and amortisation (non-cash charges and accounting policy differences) to provide a cleaner measure of operating profitability. EV/EBITDA is widely used in M&A and company comparisons.