topic 6 securities and valuation

bond and their characteristics

bond valuation

shares and their characteristics

shares and valuation

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 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)-nt/ Y ] + [ F/(1+Y/n)n*t]

  • P: bond price
  • Y: yield rate
  • n: number of period
  • F: future value
    image
  • 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 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

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

lec 7 risk and return, CAPM

risk and return of single investment (Asset)

risk and return of portfolio-portfolio theory

CAPM - capital asset pricing model

rate of return formula:
% return = (amount received - amount invested)/amount invested
expected return = P1r1 + P2r2+...+Pnrn
=> image
image

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
image

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

image
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
  • 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
    => image

5 different term used to describe discount rate

  • interest rate
  • yield
  • opportunity cost
  • cost of capital
  • required rate of return

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