Valuation of Bonds

# Valuation of Bonds - Valuation of Bonds • Valuation of...

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Unformatted text preview: Valuation of Bonds • Valuation of Bonds is relatively easy because the size and time pattern of cash flows from the bond over its life are known: – – • Interest payments are made usually every six months equal to one-half the coupon rate times the face value of the bond: The principal is repaid on the bond’s maturity date The bond value is defined as the present 11-1 value of its future interest and principle Valuation of Bonds Assume in 2009, a \$10,000 par value bond due in 2024 with 10% coupon will pay \$500 every six months for its 15-year life. What is the bond price if the required rate of return is 10%? • • • Present value of the interest payments \$500 x 15.3725 = \$7,686 The present value of the principal \$10,000 x .2314 = \$2,314 The bond value \$7,686+\$2,314=\$10,000 11-2 Valuation of Bonds • • • The \$10,000 valuation is the amount that an investor should be willing to pay for this bond, given the required rate on a bond of 10% If the required rate of return changes, then bond value will change inversely. What is the bond value if the return is 12%? \$500 x 13.7648 = \$6,882 11-3 Valuation of Preferred Stock • • • Owner of preferred stock receives a promise to pay a stated dividend, usually quarterly, for perpetuity Since payments are only made after the firm meets its bond interest payments, there is more uncertainty of returns Tax treatment of dividends paid to corporations (80% tax-exempt) offsets the risk premium 11-4 Valuation of Preferred Stock The value is simply the stated annual dividend divided by the required rate of return on preferred stock (kp) • Dividend V= kp • Assume a preferred stock has a \$100 par value and a dividend of \$8 a year and a required rate of return of 9 percent \$8 V= = \$88.89 .09 11-5 Valuation of Preferred Stock • Given a market price, you can derive its promised yield Dividend kp = • Price At a market price of \$85, this preferred \$8 k= stock yield pwould be= .0941 \$85.00 11-6 ...
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## This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Valuation of Bonds - Valuation of Bonds • Valuation of...

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