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SECURITIES VALUATION, CPN = Coupon rate * Face value / No.of coupon…
SECURITIES VALUATION
BONDS
Definition
a long-term debt instrument
payments: principal + interest
Key features
Maturity date
Price
Face value
Term to maturity
coupon payments
Bond valuation
Discount bonds: If yield > counpon rate then Price < Face value
Premium bonds: If yield < counpon rate then Price > Face value
Par value: If yield = counpon rate then Price = Face value
Measuring bond yield
Capital gains yield (CGY) = Change in price / Beginning price
Expected total return = YTM = (Expected CY) + (Expected CGY)
Current yield (CY) = Annual coupon payment / Current price
SHARES
Dividend growth model
Constant growth stock
Po = Do*(1+g)/ro - g = D1 / ro - g
No growth stock
g=0
Supernormal growth
Nonconstant growth stock
Corporate value model
FCF = NOPAT - Net capital investment
Apply corporate value model
FInd PV of firm's future FCFs
MV common stock = MV of firm - MV of debt and preferred
Po = MV of common stock / No.of shares
CPN = Coupon rate * Face value / No.of coupon payments per year
