...Bond Valuation By Anuj Joshi Note 1 Bond Valuation Fixed income paying securities. 1. Theoretical price or value of bond depends upon. i. Coupon Payment : Fixed amount of interest to be received after prescribed frequency. ii. Maturity Value [Unless otherwise given is exam, we should take face value] iii. Discount Rate : It should always be market interest rate 2. What is market interest rate Market interest rate is derived from comparable listed bond. The comparison is based on risk and life of the bond. E.g. If we are valuing a bond which is unlisted and have 5 years of life, then we should look for a bond which is similar in risk profile (i.e. same credit rating)and having similar life. The YTM (Yield to Maturity) of listed bond is called market interest rate The YTM of a bond is nothing but IRR of the bond. 3. Value of a bond = PV of Coupon Amount + PV of Maturity Value [Remember CF and discount rate are before tax] Concept Point: i. Coupon rate is a historical rate and should never be used as a discount rate. In exam, if no other information is available, then only we should assume coupon rate of interest as market rate of interest. ii. Remember, Cost of Capital or Discount Rate is a future concept and it represents opportunity cost on the date of valuation. iii. YTM of a similar bond (i.e. current market interest rate) is the appropriate discount rate for bond valuation. How to value a bond which pays interest at a frequency lower than annually (e...
Words: 2748 - Pages: 11
...Bond Valuation: * How do we use NPV to value bonds? One simply computes the present value of the cash flows at the appropriate rate of return. This corresponds approximately to the full price of the bond (as opposed to the listed price). * E.g.: a one period, $1000 bond, 10% coupon is valued at: $1037 (1100/1.06) if the market rate of return is 6%. The bond sells at a premium. * $1000 if the market rate of return is 10%. The bond sells at par. * $982 if the market rate of return is 12%. The bond sells at a discount. Tentative Conclusions * The higher the appropriate interest rate, the lower the price of the bond. * If the yield matches the coupon , then the bond sells at par. * If the yield is higher than the coupon, the bond sells at a discount. * If the yield is lower than the coupon, the bond sells at a premium Example: * Consider now an infinite bond, paying a 10% coupon, i.e. $100 forever. * Then if the market return is 10% the bond sells at 100/0.1 =1000. * If the market return is 6% the bond sells at 100/0.06 = 1667 * If the market return is 12% the bond sells at 100/0.12 = 833 * A tentative conclusion: it seems that longer maturity bonds are affected more by interest rate swings. * We will modify this conclusion later. Valuing a Bond * If today is October 1, 2010, what is the value of the following bond? An IBM Bond pays $115 every September 30 for 5 years. In September 2015 it pays...
Words: 1065 - Pages: 5
...BondBond Valuation Valuing the cash flows Chapter 7 (1) coupon payment (interest payment) = (coupon rate * principal) Bonds, Bond Valuation, and Interest Rates usually paid every 6 months (2) maturity value = principal or par value = $1000 Example (coupon rate = rd) Five year corp. bond pay coupons at 10% rate, market rate (discount rate) (required rate of return) is 10% Example (coupon rate = rd) Define Terms C rd = 10% 0 1 2 3 4 5 ├───────┼───────┼───────┼───────┼───────┤ P0 $100 $100 $100 $100 $100 $1,000 F n rd P0 = coupon payment = coupon rate x $1000 = 10% x $1,000 = $100 = face amount or maturity value = $1000 = payments to maturity = 5 = required rate of return = 10% = bond value = ? 1 Example (coupon rate = rd) P0 = PV of coupon annuity + PV of lump sum maturity value PV of coupon annuity = $379.08 PV of lump sum maturity value = $620.92 P0 = $379.08 + $620.92 = $1,000.00 Solve with Calculator PMT = C FV = F I/Y = rd N P0 PMT = C FV = F I/Y = rd N = 100 = 1000 = 10% =5 = PV = 1,000 In this case coupon = rd so P0 = F This Bonds sells at PAR Example (coupon rate > rd) Five year corp. bond pay coupons at 10% rate, market rate is 8% = 100 = 1000 = 10% =5 Example (coupon rate > rd) P0 = 399.27 + 680.58 = $1,079.85 Calculator: PMT = C FV = F I/Y = rd N P0 = 100 = 1000 = 8% =5 = PV = $1,079.85 2 Example (coupon rate...
Words: 1436 - Pages: 6
...ICB Mutual Funds ICB Mutual Funds are also known as close ended Mutual Funds. The issued capital of a Mutual Fund is limited, that is, a Mutual Fund offers a limited number of certificates for sale to the public. The amount of capital and the number of certificates of each Mutual Fund remains unchanged. ICB Mutual Funds are independent of one another. A Mutual Fund being listed is traded on the Stock Exchanges. Price of Mutual Fund certificates after IPO is determined on the Stock Exchanges through interaction of supply and demand. The market price of a Mutual Fund certificates is available in Stock exchange quotations and in newspapers. Performances of ICB Mutual Fund The Considerations underlying the performance evaluation of mutual funds is a matter of concern to the fund managers, investors and researchers alike. The present paper attempts to answer two questions relating to mutual fund performance; 1. Whether the growth oriented Mutual Fund are earning higher returns than the benchmark returns (or market Portfolio/Index returns) in terms of risk. 2. Whether the growth oriented mutual funds are offering the advantages of Diversification, Market timing and Selectivity of Securities to their investors. This paper attempts to answer the questions raised, by initially describing some basic concepts and later by employing a methodology which was used by Sharpe (1966), Treynor (1965), and Jenson (1968) and finally given appropriate comments. ...
Words: 296 - Pages: 2
...Financial Management Unit 4 Unit 4 4.1 Introduction 4.2 Valuation of Bonds Types of Bonds 4.2.1 Irredeemable or Perpetual Bonds Valuation Of Bonds And Shares 4.2.2 Redeemable or Bonds with Maturity Period 4.2.3 Zero Coupon Bond Bondyield Measures 4.2.1 Holding Period Rate of Return 4.2.2 Current Yield 4.2.3 Yield to Maturity (YTM) 4.2.4 Bond Value Theorems 4.3 Valuation of Shares 4.3.1 Valuation of Preference Shares 4.3.2 Valuation of Ordinary Shares 4.4 Summary Solved Problems Terminal Questions Answers to SAQs and TQs 4.1 Introduction Valuation is the process of linking risk with returns to determine the worth of an asset. Assets can be real or financial; securities are called financial assets, physical assets are real assets. The ultimate goal of any individual investor is maximization of profits. Investment management is a continuous process requiring constant monitoring. The value of an asset depends on the cash flow it is expected to provide over the holding period. The fact that as on date there is no method by which prices of shares and bonds can be accurately predicted should be kept in mind by an investor before he decides to take an investment decision. The present chapter will help us to know why some Sikkim Manipal University 50 Financial Management Unit 4 securities are priced higher than others. We can design our ...
Words: 3016 - Pages: 13
...ABSTRACT The purpose of this research is to attempt to understand to what degree accounting information can serve as a valid predictor of future financial performance. It is understood and often disputed that predicting financial performance beyond a time horizon of four years, using accounting analysis is not as reliable as initially determined. Based on both academic research studies and reviews alongside nonacademic reviews, it seems plausible to a certain comfortable level that it is possible to incorporate targeted and focused accounting information and ratios in conjunction with additional industry/market based variables within statistical models to be successful in predicting future performance beyond the short run. Financial ratios, together with other analyses, are widely used as critical indicators in evaluating a firm’s performance. One question constantly arises, which financial ratios are informative among the hundred ratios available? Material below will identify and support particular ratios of focus. Research also suggests that in order to accurately forecast future financial performance, accounting information needs to work alongside other variables (i.e. firm size, economic trends, and industry specific ratios). Beyond the microeconomics of the company, analysis should also consider relevant macroeconomics that can have a direct correlation on a firm’s success. Based on all findings included, there has been no distinct criticism of using accounting information...
Words: 2240 - Pages: 9
...Week 3 DQ 2 Forecasting Methods Read Problem 6 in Chapter 6 of your textbook. Calculate and answer parts a through d. Include all calculations and spreadsheets in your post. Explain why the moving average method was used instead of another forecasting method. What might be another forecasting method that could prove to be just as useful? Your initial post should be 200-250 words. Below see the number of mergers that took place over a 12-year period in the savings and loan industry. |Year | |Mergers | |Year | |2005 |61 |52.6 |8.4 |70.56 | |2006 |83 |55.6 |27.4 |750.76 | |2007 |123 |63 |60 |3,600 | |2008 |97 |75.2 |21.8 |475.24 | |2009 |186 |85.6 |100.4 |10,080.16 | |2010 |225 |110 |115 |13,225 | |2011 |240 |142.8 ...
Words: 573 - Pages: 3
...which time value of money can help corporate managers in general. The time valuation of money is the idea that money available now could be worth more than the same amount in the future, because that current money has the possibility of earning money in the future. Think if the expression, “It takes money to make money!” If you are guaranteed to have $100.00 now or $100.00 in 3 years, you would probably take the money now. However, the $100.00 you could have now can be utilized to make even more money in the future through investing. This concept is very important in the business world as corporations are always looking to increase investing opportunities that will prove profitable. Time valuation enables corporate managers to determine two major aspects of investments; How much to invest and the rate of return on that investment. A company needs to know how much they need for an initial investment and how much that investment will yield over a given period of time. This is also where compounded interest plays a major role, the more the interest is compounded the greater the yield. Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its bondholders. Determine the fundamental manner in which this knowledge could be helpful to a financial manager. Provide a rationale for your response. Sinking funds are a method of repaying funds that were borrowed via a bond. A bond in simple terms is an IOU to individual persons or corporations that provided...
Words: 622 - Pages: 3
...Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010). Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise. This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options. Questions to be addressed in the study are: 1. Evaluate Amoco’s and Apache’s corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller? 2. Structure and execute a DCF valuation of all the MW reserves. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias? 3. How would you structure an analysis of MW as a portfolio of assets in place and options? Specifically, which parts of the business should be regarded as assets in place and which as options? What kinds of options are present? Should this approach yield a higher or lower value that the DCF approach? 4. Execute the analysis you structured in...
Words: 996 - Pages: 4
...on the corresponding valuation date of every Individual; Hindu Undivided Family and Company at the rate of 1% of the amount by which the net wealth exceeds Rs.15 Lakhs. Education Cess of 3% is not leviable on the amount of Wealth Tax. Applicability of wealth tax: 1. Individual: The following persons treated as ‘individual’ u/s 3 of the wealth tax. a) Legal hires of an Individual. b) Holder of an impartible estate. c) Hindu deities (it means formal a god/goddess ) d) Trustees of a trust who are liable u/s 21A. e) Trade unions 2. HUF 3. Company 4. AOP chargeable u/s 21AA : Situation Shares of members of an AOP are determinate or known. Shares of members of an AOP are indeterminate or unknown. Wealth Tax assessment Interest of members in the assets of the AOP shall be valued as per Rule 16 and 17 of Schedule III. Wealth tax is levied on the AOP. It is liable to tax at the rate leviable upon and recoverable from an individual who is any Indian citizen and resident. Valuation Date: Sec.2 (q): It refers to the 31st March immediately preceeding the assessment year. This provision does not apply to – a. Company registered U/s 25 of the companies Act, 1956 b. Cooperative society and c. Any social club d. Any political party e. Any mutual fund U/s 10(23D) CHARGEABILITY Individual HUF / Companies Nationality Residential Status Location of assets as on the valuation date Residential Status Location of assets as on the valuation date Direct Tax...
Words: 12386 - Pages: 50
...2 Graduate Thesis By Teia R. Merring Copenhagen Business School Strategic and financial analysis and valuation of B&O 0 1 Executive Summary................................................................................2 Introduction............................................................................................6 1.1Motivation.................................................................................................................. 6 1.2Problem Specification................................................................................................ 8 1.3Problem Identification................................................................................................ 8 1.4Problem Handling .................................................................................................... 10 1.5Structure and Methodology...................................................................................... 12 1.5.1Introduction and Presentation........................................................................... 12 1.5.2Strategic Analysis............................................................................................. 12 1.5.3Financial Statement Analysis ........................................................................... 13 1.5.4Prognoses and Budgets..................................................................................... 14 1.5.5Valuation.......................................
Words: 60014 - Pages: 241
...a multiples analysis, calculating and defending an estimate of Crocs value. Soln: Comparable companies analysis – Done to determine appropriate valuation multiple for Crocs, Inc. • • Selected peer group based on industry, business and financial characteristics Included explosive growth stocks such as Lulelemon & Under Armour having similar prospects for growth and ROIC as Crocs, Inc. and some mature, stabilized businesses with stable industry growth rates – Nike, Deckers & Timberland. This mix will help us provide valuation from an aggressive sales growth and maturing sales context. Some characteristics used in selection include – o Primary or at least significant portion of business revenue comes from footwear & apparel – analogous to Crocs primary business o Has product appeal to large group of customers o Has distinct product attributes (innovative/creative) and differentiation from competition o Has wide range of distribution channels o CAGR Sales growth, COGS to Sales & Significantly less debt exposure on their balance sheets o Have characteristics of high octane growth and show signs of maturity and stabilizing long-term growth similar to well established footwear brands. • Valuation Multiples The objective was to compare operating metrics and valuation multiples in a peer group to that of Crocs, Inc. for equity valuation. The market multiple model is based on the idea that on average, a company, over time would have roughly the same value as its peers. Assumption:...
Words: 2072 - Pages: 9
...ts/ For More Courses and Exams use this form ( http://hwguiders.com/contact-us/ ) Feel Free to Search your Class through Our Product Categories or From Our Search Bar (http://hwguiders.com/ ) FIN 571 W2 Ch 5 Problem A1 (Bond Valuation) FIN 571 W2 Ch 5 Problem A10 (Dividend discount model) FIN 571 W2 Ch 5 Problem A12 (Required return for a preferred stock) FIN 571 W2 Ch 5 Problem A14 (Stock Valuation) FIN 571 W2 Ch 5 Problem B16 (Interest-rate risk) FIN 571 W2 Ch 5 Problem B18 (Default risk) FIN 571 W2 Ch 5 Problem B20 (Constant growth model) FIN 571 W2 Ch 7 Problem C1 (Beta and required return) FIN 571 Week 2 Individual Assignment Text Problem Sets Get Tutorial by Clicking on the link below or Copy Paste Link in Your Browser https://hwguiders.com/downloads/fin-571-week-2-individual-assignment-text-problem-sets/ For More Courses and Exams use this form ( http://hwguiders.com/contact-us/ ) Feel Free to Search your Class through Our Product Categories or From Our Search Bar (http://hwguiders.com/ ) FIN 571 W2 Ch 5 Problem A1 (Bond Valuation) FIN 571 W2 Ch 5 Problem A10 (Dividend discount model) FIN 571 W2 Ch 5 Problem A12 (Required return for a preferred stock) FIN 571 W2 Ch 5 Problem A14 (Stock Valuation) FIN 571 W2 Ch 5 Problem B16 (Interest-rate risk) FIN 571 W2 Ch 5 Problem B18 (Default risk) FIN 571 W2 Ch 5 Problem B20 (Constant growth model) FIN 571 W2 Ch 7 Problem C1 (Beta and required return) FIN 571 Week 2 Individual Assignment...
Words: 3279 - Pages: 14
...Group Work: Financial Statement Analysis of your selected listed Bangladeshi company Guideline for Term Paper Dear All, Please complete the strategy analysis and accounting analysis based on the following guideline by next 2 weeks for the company allocated to your group for term paper, and give me the update. Topic Specific Topics Key Questions Strategy Analysis Industry Analysis (Five forces Model) Rivalry -How do firms in an industry rivalry compete among themselves? -What are the dimensions of the competition? Threat of new entrants -What are the legal entry barriers for a new firm? -What are the economic entry barriers for a new firm? Threat of substitute products -Is there any substitute products of the industry? -If so, What is the level of price difference with substitute product? Bargaining power of buyers -What is level of buyers’ price sensitivity? -What is the buyers’ relative bargaining power? Bargaining power of suppliers -How many numbers of suppliers? -How much critical the product is to buyers? Competitive Strategy Analysis Which competitive strategy the company has taken? Cost leadership or Differentiation Corporate Strategy Analysis -Are there significant imperfections in the product, labor or financial markets in the industry in which the company is operating? - Does the company have special resources such as brand names, proprietary know how, access to scarce distribution channels, and special organization...
Words: 317 - Pages: 2
...ultimately reduced their business risk. In analyzing the financial risk, the continuous acquisitions have definitely increased the operational risk for the company. Since the case didn’t provide us with the financial statements for Monmouth, we can assume that in order to complete the acquisition they have to issue stocks as they exhausted (or will pretty soon exhaust) their debt capacity. 2. Based on the DCF valuation and using a WACC of 8.25% (the beta assumed to be 1, the average beta of comparable firms and the coupon rate to be 7.96%, the rate for BB rated companies) and a growth rate of 5.5%. The fair price is $40.4 per share for Robertson, lower than the $50 offered by Simmons to sell their stocks but higher than the current market price of $30. As for the peer multiples, and due to the lack of information for the comparable companies we only managed to calculate the EBIAT multiple, the earnings multiple and the book value multiple using the three comparable companies, Actuant Corp, Snap On Inc., and Stanley Works. The result of the multiple valuation showed a fair price of $40.1 per share based on the EBIAT multiple and a value of $29.61 per share based on the earnings multiple. Both prices are below the fair price calculated by the DCF. Only the book value multiple exceeded the DCF fair value with a value of $65.25. The first two multiples failed to capture the future potential and growth of the corporation, where the DCF managed to include it as a factor in the...
Words: 681 - Pages: 3
