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
- 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
=>
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
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
=>
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