Chap4_2009 - Chapter 4 The Valuation of Long-Term...

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Chapter 4 The Valuation of Long-Term Securities
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Learning Objectives After studying Chapter 4, you should be able to: 1. Distinguish among the various terms used to express value. 2. Value bonds, preferred stocks, and common stocks. 3. Calculate the rates of return (or yields) of different types of long-term securities. 4. List and explain a number of observations regarding the behavior of bond prices.
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Topics Distinctions Among Valuation Concepts Bond Valuation Preferred Stock Valuation Common Stock Valuation Rates of Return (or Yields)
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What is Value? • Going-concern value represents the amount a firm could be sold for as a continuing operating business. Liquidation value represents the amount of money that could be realized if an asset or group of assets is sold separately from its operating organization.
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What is Value? (2) a firm : total assets minus liabilities and preferred stock as listed on the balance sheet. Book value represents either (1) an asset : the accounting value of an asset -- the asset’s cost minus its accumulated depreciation;
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What is Value? • Intrinsic value represents the price a security “ought to have” based on all factors bearing on valuation. Market value represents the market price at which an asset trades.
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Bond Valuation Important Terms Types of Bonds Valuation of Bonds Handling Semiannual Compounding
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Important Bond Terms The maturity value (MV) [or face value] of a bond is the stated value. In the case of a U.S. bond, the face value is usually $1,000. A bond is a long-term debt instrument issued by a corporation or government.
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Important Bond Terms The discount rate (capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk. The bond’s coupon rate is the stated rate of interest; the annual interest payment divided by the bond’s face value.
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Different Types of Bonds A perpetual bond is a bond that never matures. It has an infinite life. d t t d d d d k I k I k I k I k I V 1 2 1 ) 1 ( ) 1 ( ) 1 ( ) 1 ( [4.1] [4.3] [4.2]
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Perpetual Bond Example Bond P has a $1,000 face value and provides an 8% annual coupon . The appropriate discount rate is 10% . What is the value of the perpetual bond ? I = $1,000 ( 8% ) = $80. k d = 10% . V = I / k d [ Reduced Form ] = $80 / 10% = $800 .
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Different Types of Bonds A non-zero coupon-paying bond is a coupon paying bond with a finite life. ) , , / ( ) , , / ( ) ( ) ( ) 1 ( ) 1 ( ) 1 ( ) 1 ( ) 1 ( ) 1 ( , , 1 2 1 n k F P MV n k A P I PVIF MV PVIFA I k MV k I k MV k I k I k I V d d n k n k n d n t t d n d n d d d d d [4.4] [4.5]
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8% annual coupon for 30 years . The appropriate discount rate is 10% . What is the value of the coupon bond ? Coupon Bond Example
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This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

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Chap4_2009 - Chapter 4 The Valuation of Long-Term...

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