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topic 6 securities and valuation, lec 7 risk and return, CAPM, 5 different…
topic 6 securities and valuation
bond and their characteristics
long term debt instrument > 1yr
borrower agree:
pay principal and interest
in specific dates
people issue bond:
treasury bonds-gov
corporate bonds-corporations
municipal bonds-state and local
foreign bonds-foreign coporation
features's bonds:
face value: amount borrowed
maturity date: date must paid face value
price: PV of bonds
term to maturity
yield (required rate of return) : sinh lợi
coupon payment-interest from money borrowed
coupon rate (as interest rate) lãi suất nhưng có trong chứng khoán
Coupon payment = face value * (annual coupon rate / number of payments per year)
yield changes overtime bcz risk security changed
security's price fluctuate over its life
if sold not maturity security its return as function of purchase price and selling price
bond valuation
bond price = present value
coupon rate constant
bond risk
interest risk: IR increase => bond price decline
reinvestment risk: decline IR => decline income => decline invest
default risk: bankrupt or impossible paid (người vay không thể trả nợ)
formula: coupon bond price
Coupon Bond
= C
[1 – (1+Y/n)-n
t/ Y ] + [ F/(1+Y/n)n*t]
P: bond price
Y: yield rate
n: number of period
F: future value
yield < %C => price > face value => at premium
yield > %C => price < face value => at discount
yield = %C => price = face value => at par
current yield(CY)=annual CPN/current price
capital gain yield(CGY)=change in price/beginning price
expected total return = YTM =CY+CGY
shares and their characteristics
shares represent ownership, have right
attend AGM
vote position (CEO)
making important decision
residual clams
receive dividend
stock is not maturity
can buy stock in open market
shares and valuation
dividend yield, CGY, total return = DY + CGY
expected market price of stock one year from now => find P1
market value = present value of future value FCF
MV of common stock=MV of firm - MV of debt & preferred
intrinsic stock price/value = MV of common stock/# of shares
bond risks:
interest risk, risk of decline bond price
investment risk: i falls lead to fall income from bond
default risk: borrower no $ to pay
lec 7 risk and return, CAPM
risk and return of single investment (Asset)
rate of return formula:
% return = (amount received - amount invested)/amount invested
expected return = P1r1 + P2r2+...+Pnrn
=>
2 types investment risk & return (low or negative return)
stand alone risk
portfolio risk
large standard deviation => nearly expected return
coefficient of variation (CV) show risk per unit of return= std dev/mean
investor attitude toward risks
risk aversion
: investor dislike risk-require high return rate-attractive they hold riskier security
risk premiun
: provide compensation to hold riskier securities
risk and return of portfolio-portfolio theory
W: weight (%)
creating portfolio
sdev decrease when add stock,
expected return constant
breaking down sources of risks
stand-alone risk = market risk + firm specific risk
market risk: cannot elimilate
can be eliminate
CAPM - capital asset pricing model
base concept stock require rate of return = risk-free rate + risk premium
primary conclusion: RRR = Risk-free rate of return + Beta X (Market rate of return - Risk-free rate of return)
=
rate of return formula:
% return = (amount received - amount invested)/amount invested
expected return = P1r1 + P2r2+...+Pnrn
=>
5 different term used to describe discount rate
interest rate
yield
opportunity cost
cost of capital
required rate of return
