Chap00-bondstock valuation.pptVIP

Chapter Outline 4.1 Definition and Example of a Bond 4.2 How to Value Bonds 4.3 Bond Concepts 4.4 The Present Value of Common Stocks 4.5 Estimates of Parameters in the Dividend-Discount Model 4.6 Growth Opportunities 4.7 The Dividend Growth Model and the NPVGO Model (Advanced) 4.8 Price Earnings Ratio 4.9 Stock Market Reporting 4.10 Summary and Conclusions 4.1 Definition and Example of a Bond A bond is a legally binding agreement between a borrower and a lender: Specifies the principal amount of the loan. Specifies the size and timing of the cash flows: In dollar terms (fixed-rate borrowing) As a formula (adjustable-rate borrowing) Maturity date For example, K-enterprise just issued 100,000 bonds for $1,000 each, where the bond have a coupon rate of 5 percent and a maturity of 2 years. Interest on the bonds is to be paid yearly. Terminology par value: face value, usually Maturity date: the date when the issuer of the bond makes the last payment; the bond is said to mature or expire on the date of its final payment. Face value: the payment at maturity is termed the bond’s face value. Pure discount bonds: are often called zero-coupon or zeros to emphasize the fact that the holder of the bond receives no cash payments until maturity. The terminologies like zero, bullet and discount interchangeably to refer to the bonds that pay no coupons. Question : what ‘s Coupon? 4.1 Definition and Example of a Bond Consider a U.S. government bond listed as 6 3/8 of December 2009. The Par Value of the bond is $1,000. Coupon payments are made semi-annually (June 30 and December 31 for this particular bond). Since the coupon rate is 6 3/8 the payment is $31.875. On January 1, 2005 the size and timing of cash flows are: 4.2 How to Value Bonds Identify the size and timing of cash flows. Discount at the correct discount rate. If you know the price of a bond and the size and timing of cash flows, the yield to maturity is the discount rate. 4.2 Valuation of Bonds and Stock Fi