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Bond and Stock Valuation PPT

# Bond and Stock Valuation PPT - 4-1 Chapter 27&28 Bond and...

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4-1 Chapter 27 &28 Bond and Stock Valuation n Bonds n Preferred Stock n Common Stock n Security Market Equilibrium

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4-2 Value = = CF 1 (1+k) 1 + CF 2 (1+k) 2 .... CF n (1+k) n How can we value assets based on expected future cashflows? 0 1 2 n Value CF1 CF2 CFn Σ n t=1 CF t . (1+k)t
4-3 The discount rate k is the opportunity cost of capital and depends on: 1) riskiness of cashflows 2) general level of interest rates How is the discount rate determined?

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4-4 0 1 120 1,00 0 VB = \$120 \$1,000 (1+kd)1 (1+kd)1 What’s the value of a 1-year, 12% annual coupon bond if kd = 12%? = \$107.14 + \$892.86 = \$1,000 12 % VB = ? +
4-5 Find the value of a 10 year 12% annual coupon bond. 0 1 0 120 +1000 1 2 120 120 V B VB = \$120 \$120 \$1,000 (1+kd)1 (1+kd)10 (1+kd)10 + .... + + = \$107.14 + ...+ \$38.64 + \$321.97 = \$1,000 .

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4-6 N I/YR PV PMT FV N PV F V I/YR PMT Inputs 10 12 120 1,000 Output -1,000 The bond consists of a 10-year, 12% annuity of \$120/year plus a \$1,000 lump sum at t = 10: PV annuity = \$ 678.03 PV maturity value = 321.97 PV Bond = \$1,000.00
4-7 What would the value of the bonds be if k = 15%? N PV F V I/YR PMT Inputs 1 15 120 1,000 Output -973.91 1-year bond:

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4-8 N PV F V I/YR PMT Inputs 10 15 120 1,000 Output -849.44 10-year bond: When kd rises above the coupon rate, the bonds’ values fall below par , so they sell at a discount.
4-9 N PV F V I/YR PMT Inputs 1 9 120 1,000 Output -1,027.62 What would the value of the bonds be if k = 9%? 1 year bond

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4-10 10-year bond: N PV F V I/YR PMT Inputs 10 9 120 1,000 Output -1,192.53 When kd falls below the coupon rate, the bonds’ values rise above par, so they sell at a premium . The longer the maturity, the larger the premium.
4-11 Value of 12% coupon bond over time: 1,308 1,193 1,000 849 803 M kd = 12% kd = 9% kd = 15% 30 20 10 0 Years to Maturity

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4-12 Summary If kd remains constant: n At maturity, the value of any bond must equal its par value. n Over time, the value of a premium bond will decrease to its par value. n Over time, the value of a discount bond will increase to its par value. n A par value bond will stay at its par value.
4-13 0 1 2 1 0 .... .... What is the YTM on a 10 year 12% annual coupon \$1,000 par bond that sells for \$895.68? 120 120 120 1,000 PV1 PV9 PV10 PVM .

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Bond and Stock Valuation PPT - 4-1 Chapter 27&28 Bond and...

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