MGMT310_lecture11

MGMT310_lecture11 - Last Lasttimewediscussed $ CouponBonds...

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st time we discussed… Last time we discussed… Valuing assets based on time value of $$ Coupon Bonds Annuity with a final repayment of principle Zero Coupon (i.e., pure discount) Bonds Simple present value calculation Determinants of bond prices/yields Expected inflation p Real rate of interest Tax treatment Liquidity Remember , investors “protect” themselves by simply paying less for a security that is skier or has less favorable characteristics! qy Default risk Interest rate risk ow t’s look at some review Q’s then we’ll start stock valuation ( 8) riskier or has less favorable characteristics! Now let s look at some reviewQs, then we ll start stock valuation (ch. 8)
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eview Questions Review Questions 1. Consider two zero coupon bonds: one maturing in 5 five years and the other maturing in 10 years. Which has greater duration? Which is more sensitive to fluctuations in interest tes? rates? 2. Now consider two par value bonds: one maturing in 3 years d e ther aturing ars hich ore nsitive and the other maturing in 4 years. Which is more sensitive to fluctuations in interest rates?    1 Recall: T t t PV CF Duration t P Vb o n d  CF t = cash flows from bond at time t PV(bond) =p r i c e of bond (i.e., PV of all cash flows promised by the bond) Btw, I’ve posted bond related practice problems + solutions on Katalyst.
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aluing stocks Valuing stocks Does a share of stock have a maturity? If we used annuity formulas to value bonds, what do you think we use to value stocks? epends on some assumptions Depends on some assumptions…
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nding the rice Finding the price If we know the required rate of return (or expected return), we can determine the stock price: iv P P 0 is the price of the share today (t=0) e xpected) rice f e are 11 0 Div P 1r P 1 is the (expected) price of the share at t=1; Div 1 is the (expected) dividend paid at t=1 r is the required/expected rate of return A more general price equation: T tt T Div Div P   0 tT t t1 P       Q1: Why do we use dividends rather than net income? Or cash flow from assets?
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This note was uploaded on 01/31/2011 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue.

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MGMT310_lecture11 - Last Lasttimewediscussed $ CouponBonds...

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