Lecture 3 v2 – Bonds and Stock Valuation
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Transcript of Lecture 3 v2 – Bonds and Stock Valuation
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Lecture 3 BondsValuationFIN 2102 25 April 2016
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Agenda:
1. e!ision. "iscounting #actor$ FV$ %V$N%V$ annuities
2. &'at is a (ond)
3. "e*nitions: +oupon rate$ +urrent ,ieldn -ield to aturit,$ /aret "iscountInterest ate.
. "e*nitions: Face Value$ /aret Value$Fair !alue
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A4N"A 2
5. Valuation o# Bonds
6. &'at is 7toc 7'ares)
8. Valuation o# 7tocs.
9. /ain role o# stoc ec'ange
;. 4
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4VI7I>N7:
FV ? %V 1 @in
%V ?FV
11@in
Annuities:
%VA? A
1 1
1@ in
i
FVA ? A
1@ in 1
i
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&'at i# a copan, sells ,ou a certi*cate#or / 1$000 and proises to pa, t'e(u,er 5 o# / 1$000 i.e. /50 e!er,,ear #or 3 ,ears)
And proises to pa, (ac t'e 'ole /
1$000 at t'e end o# 3 ,ears.C'is is a DBondE
/ 1$000 is t'e Face Value 5 o# t'e Face Value / 1$000 is t'e
Coupon Rate
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&'at i#$ a#ter t'e copan, sells it to t'e
original (u,er #or / 1$000$ t'e original(u,er sells it #or / ;13)
Is t'e (ond !alue / 1$000 or / ;13)
Bot'. / 1$000 is t'e Face Value and
/ ;13 is t'e /aret ValueFace Value ill ala,s (e the same
#or t'e (ond.
Market Value is t'e price 'ere t'ere
is a illing (u,er and seller #or t'e(ond.
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C'e ne oner ill recei!e / 50 #or
t'e reaining 2 ,ears o# t'e (ond. i.e.up to aturit, o# t'e (ond
Is 'e getting 5 return on t'e (ond liet'e pre!ious oner)
No. =is return is /50 / ;13 ?0.059 or 5.9
Is t'e coupon rate still 5) C'en 'at is5.9)
+oupon rate 5 does not c'ange. It isdependent on Face Value.
C'is 5.9 is t'e +urrent -ield anddependent on /aret Value
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I# t'e ne oner (oug't t'e (ond at t'e
(eginning o# ,ear 2 i.e. end o# ,ear 1#or / ;13$ 'e ill still recei!e / 50#or t'e reaining 2 ,ears
AN" / 1$000 at aturit,
&'at is t'e pro*t return #or t'e neoner)
/ ;13?
/ 50
1 @ i
/ 50
1 @i2
/ 1$000
1 @i2
@ @
7ol!e #or i #or rate o#return
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i is #ound to (e 10. 7o 'at is t'is!alue) C'e ne coupon rate)
C'e ne current ,ield)
No. It is called D-ieldGtoGaturit,E or HustD-ieldE
It is t'e discount rate 'ere t'e price o#a (ond euates to t'e present !alue o#
all (ene*ts arising #ro t'e (ond.
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&'at i# t'e (ans outside are gi!ing
interest rates o# on deposits)C'is is t'e /aret "iscount Interest
ate
7o #ro t'is eapleJ. +oupon ate ? 5
+urrent ,ield ? 5.9
-ieldGtoGaturit, ? 10
"iscount rate ?
Face Value ? / 1$000
/aret Value ? / ;13
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VALK4 >F B>N"Co o(tain t'e Fair !alue o# (ond$ use
Ban interest rate
Ban interest rate #air !alue o# (ond!alue G in!erse relations'ip.
and t'e lengt' o# tie to aturit,.
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-ieldGtoG /aturit,
Ksuall, taen to e t'e rate o# return o#t'e (ond'older.
It is ade up o# :
C'e real rate of return t'e opportunit,cost or *nancial DrentE t'e in!estorc'arges #or using 'is #unds
Ination premium
Risk premium a special ris associatedit' t'e speci*c in!estent.
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I# t'e no oner is'es to 'a!e a
return o# sa, 12$ i.e. ,ield to aturit,o# 12 'at is t'e price 'e is ill topa, #or t'e (ond)
%rice o#t'e(ond
? / 50
1 @0.122
/ 50
1 @0.12
/ 1$000
1 @0.122
@ @
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Valuation o# stoc s'ares
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"IVI"4N" VALKACI>N />"4L
&ors on t'e preise t'at t'e !alue o# a
s'are to t'e s'are'older is t'e proise o#
recei!ing #uture di!idends.
7o i# t'e coon stoc pa,s a constant
di!idend eac' ,ear t'en t'e price o# t'e stoc
ill (e:
P0? D1
Ke'ere P0 = price o# t'e stoc toda,,D1 = "i!idend paid
Ke= euired rate o# return o# s'are
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"IVI"4N" VALKACI>N />"4L
I# di!idends are in constant grot' t'eprice o# t'e s'are is #ound (,:
D1
Ke g
'ere P0 = price o# t'e stoc toda,,
D1 = "i!idend paidKe= euired rate o# return o# s'are
g? +onstant grot' rate in di!idends
P0?
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7C>+ 4M+=AN4 Financial arets eist to allocate
capital #ro 'ouse'olds to corporations
and go!ernent units$ it' *nancial
institutions acting as interediaries.
7toc ec'anges is an eaple o#
*nancial arets.
4aples: N-74 NA7"A
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I/%>CAN+4 >F
7C>+ 4M+=AN4 %ro!ides liuidit, in twoa,s:
1. 4na(le corporations to raise #unds (,
selling ne issues o# securities at #air$copetiti!e prices.
2. Allos t'e in!estor 'o purc'ases
securities to sell t'e at relati!e easeand speed.
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/A4C 4FFI+I4N+-/arets are generall, said to (e e
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4FFI+I4NC /A4C=-%>C=47I7
7tates t'at i# stoc arets are e
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4FFI+I4NC /A4C
=-%>C=47I7Weak =ere past price in#oration is unrelated to
#uture prices
Crends cannot (e predicted and taenad!antage o# (, in!estors.
Semi-strong %rices currentl, reOect all pu(lic
in#oration
Strong All in#oration is iediatel, reOected in
stoc prices
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47KLC7 >F 7CK"I47
7toc ec'anges #ound to (e ainl,
ea and seiGstrong (ut not strong
%ri!ate$ insider in#oration is
!alua(le #or uic pro*ts (ut it is
illegal.
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+=AN47:
As counication s,stes ipro!e$
in#oration get disseinated #aster and
securities la are #orcing #ullerdisclosure o# corporate data.
7ecurities arets getting ore e
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4F44N+4 Bloc$ =irt and "anielson$ Foundations
o# Financial /anageent$ 15t'4dition $
/cra =ill 4ducation 2011 +'apters10 and 1