AND STOCKS
• Liquidation Value
• Book Value
• Market Value
• Intrinsic Value
n
P=Σ C
+
M
t=1 (1+r)t (1+r)n
P = C x PVIFAr,n + M x PVIFr,n
2n
P = Σ C/2
(1+r/2)t
+
M
(1+r/2)2n
t=1
P = C/ 2 x PVIFAr/2,2n + M ( PVIFr2,2n)
16
P=Σ 6
+
100
t=1 (1.07)t (1.07)16
Coupon rate < Required yield Price < Par (Discount bond)
YEILD
A
PAR VALUE BOND: rd = 13%
B
DISCOUNT BOND: rd = 15%
8 7 6 5 4 3 2 1 0
YEARS TO MATURITY
BOND PRICE THEOREMS
1. Bond prices & yields move in opposite
directions
2. Bond Prices Are More Sensitive To Yield
Changes The Longer Their Maturities
3. The price sensitivity of bonds to yield
changes increases at a decreasing rate
with maturity
4. High coupon bond prices are less sensitive
to yield changes than low coupon bond
prices
5. With a change in yield of a given number of
basis points, the associated percent gain is
larger than the percent loss.
Centre for Financial Management , Bangalore
BOND YIELDS
• CURRENT YIELD
ANNUAL INTEREST
PRICE
• YIELD TO MATURITY
C C C M
P = + + …. +
(1+r) (1+r)2 (1+r)n (1+r)n
8 90 1,000
800 = +
t=1 (1+r)t (1+r)8
AT r = 13% … RHS = 808
AT r = 14% … RHS = 768.1
808 - 800
YTM = 13% + (14% - 13%) = 13.2%
808 - 768.1
C + (M - P) / n
YTM ≃
0.4M + 0.6 P
• YIELD TO CALL
n* C M*
P = +
t=1 (1+r)t (1+r)n
Centre for Financial Management , Bangalore
REALISED YIELD TO MATURITY
FUTURE VALUE OF BENEFITS
0 1 2 3 4 5
• INVESTMENT 850
• ANNUAL INTEREST 150 150 150 150 150
• RE-INVESTMENT
PERIOD (IN YEARS) 4 3 2 1 0
• COMPOUND FACTOR
(AT 16 PERCENT) 1.81 1.56 1.35 1.16 1.00
• FUTURE VALUE OF
INTERMEDIATE CASH FLOWS 271.5 234.0 202.5 174.0 150.0
• MATURITY VALUE 1000
• TOTAL FUTURE VALUE = 271.5 + 234.0 + 202.5 + 174.0 + 150.0 + 1000
= 2032
(1+r*)5 = 2032 / 850 = 2.391
r* = 0.19 OR 19 PERCENT
Centre for Financial Management , Bangalore
ILLUSTRATIVE QUOTATION
Date Security Security Issue Trade No of Traded Low Price High Last Price YTM
Type Name Name Type Trades Value / Rate Price/ Rate
The retail trade in corporate debt securities is done mostly on the capital
market segment of the National Stock Exchange and the debt segment of
the Bombay Stock Exchange.
VALUATION OF PREFERENCE STOCK
n
P=Σ D
+
M
t=1 (1+rp)t (1+rp)n
= Rs. 1110.5
1 - 1+g1 n
1+r Pn
P0 = D1 +
r - g1 (1+r)n
WHERE
Pn D1 (1+g1)n-1 (1+g2) 1
=
(1+r)n r - g2 (1+r)n
1.20 6
1 -
1.15 2.40 (1.20)5 (1.10) 1
P0 = 2.40 +
.15 - .20 .15 - .10 (1.15)6
= 13.968 + 65.289
= RS.79.597
Centre for Financial Management , Bangalore
H MODEL
ga
gn
H 2H
D0
PO = [(1+gn) + H (ga - gn)]
r - gn
D0 (1+gn) D0 H (ga - gn)
= +
r - gn r - gn
D0 = 1 ga = 25% H=5
gn = 15% r = 18%
1 (1.15) 1 x 5(.25 - .15)
P0 = +
0.18 - 0.15 0.18 - 0.15
= 38.33 + 16.67 = 55.00
IF E = 2 P/E = 27.5
RS. 2.00
LOW GROWTH FIRM PO = = RS.13.33 15.0% 5.0% 4.44
0.20 - 0.05
RS. 2.00
NORMALGROWTH PO = = RS.20.00 10.0% 10.0% 6.67
FIRM 0.20 - 0.10
RS. 2.00
SUPERNORMAL PO = = RS.40.00 5.0% 15.0% 13.33
GROWTH FIRM 0.20 - 0.15
P0 = m E1
DETERMINANTS OF m (P / E)
D1
P0 =
r-g
E1 (1 - b)
=
r - ROE x b
(1 - b)
P0 / E1 =
r - ROE x b
Centre for Financial Management , Bangalore
E / P, EXPECTED RETURN, AND GROWTH
1 2
……...
E1 = D1 E2 = D2
= 15 = 15
15
r = 15% P0 = = 100
0.15
INVESTMENT .. RS. 15 PER SHARE IN YEAR 1 … EARNS 15%
2.25
NPV PER SHARE = - 15 + = 0
0.15
E1
P0 = + PVGO
r
E1 PVGO
= r 1 -
P0 P0
Principal Exchanges
Veritable Transformation
• Screen-based Trading
• Electronic Delivery
• Rolling Settlement
n
P = Σ C
(1+r)t
+
M
(1+r)n
t=1
Centre for Financial Management , Bangalore
SUMMING UP