Week 9_Fixed Income 1

Week 9_Fixed Income 1 - Fixed Income Introduction 1...

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1 Fixed Income Introduction
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2 Intrinsic Value and Market Price ± Intrinsic Value V 0 ² Self-assigned value ² Variety of models are used for estimation ± Market Price p 0 ² Consensus value of all potential traders ± Trading Signal ² V 0 > p 0 Buy ² V 0 < p 0 Sell or Short Sell ² V 0 = p 0 Hold or Fairly Priced ² Margin of safety?
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3 Balance Sheet Methods ± Book value per share = (BV(Assets) - BV(Liabilities))/#shares ² Book values often do not correspond to economic value: ± Depreciated historical costs of assets ± Intangibles, going concern value ± Liquidation value (per share) ± Replacement value (per share)
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4 Constant Growth Model ± Dividends grow at a constant rate g ± If g = 0 (constant dividend), V 0 = D/k g k D g k g 1 D ) k 1 ( ) g 1 ( D ... ) k 1 ( ) g 1 ( D ) k 1 ( ) g 1 ( D k 1 ) g 1 ( D V 1 0 1 t t t 0 3 3 0 2 2 0 0 o = + = + + = + + + + + + + + + = =
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5 Multistage Growth Rate Model ± g 1 = first growth rate ± g 2 = second growth rate ± T = number of periods of growth at g 1 T 2 2 T T 1 t t t 1 o o ) k 1 )( g k ( ) g 1 ( D ) k 1 ( ) g 1 ( D V + + + + + = =
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6 Estimating Dividend Growth Rates ± g = ROE × b. ± ROE = Return on (book) equity ± b = plowback or retention rate = (1- dividend payout rate) share per value Book share per Earning Equity of Value Book Income Net ROE = =
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7 Text reference ± This week lecture: Chapter 14-15 ² Tutorial problems due this week: ± Ch18: 2-11, 13-15,CFA: 1-4 ± Next Week lecture: Chapters 16 ² Tutorial problems due next week: ± Ch14: 2-7, 8a,9-12, CFA: 2,6 ± Ch15: 1-5, 7, CFA: 1-3
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8 Fixed Income ± Today ² Basic introduction to the instruments ² Examine the basics of bond pricing ² Introduce the yield curve ² Develop yield measures
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9 Bonds ± Essentially a loan – bond issuer borrows from bond purchaser ± Income stream is described in considerable detail ± Asset class represents a very large portion of invested wealth ± Includes corporate, government, and agency securities
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10 Bond Characteristics ± Maturity, e.g. Jan 2012 ± Face or par value, e.g. US$1000 ± Coupon rate, e.g. 6% coupon (annualized) and timing of payments ² Zero coupon bonds (zeros) ± Covenants explicitly describe other restrictions or features
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11 Indentures and Covenants ± May include restrictions or requirements ² Assets: acquisition and disposition of assets ² Dividends: dividend payments ² Financing: additional debt ² Financial ratios: current ratio, leverage ratio, etc ² Sinking funds: payment of the principle ² Bonding mechanism: an independent auditor, a trustee for bondholders, etc.
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This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

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Week 9_Fixed Income 1 - Fixed Income Introduction 1...

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