chapter 4 SECURITIES VALUATION

Chapter 4: Securities valuation4.1 Time value of money 4.2 Bond valuation 4.3 Stock valuation website: http://www.teachmefinance.com... Concept of future value • Future value FV: The va

Chapter 4

Securities valuation

Chapter 4: Securities valuation

4.1 Time value of money

4.2 Bond valuation

4.3 Stock valuation

(website: http://www.teachmefinance.com)

4.1 Time value of money

4.1.1 Time series

4.1.2 Future value

4.1.3 Present value

Concept of future value

• Future value (FV): The value of a present

amount at a certain date in the future

based on a determined rate of return

Formula for future value

• Future value of a sum of present money

Future value formula for an annuity

• If C is the amount of money paid annually

from the 1st year to nth year, after n years the future value of C annuity is :

4.1.3 Present value

• Definition

• Present value of a single sum

• Present value of annuity

• Present value of the disparate currency series

Concept of present value:

• Present value (PV): is the current

value of a future sum of money or stream

of cash flows in the future

Present value of a future :

 n

r

F PV





1

Present value of annuity

PV

n

1 1

Present value of the disparate

currency series.

• In the case of future cash flow is not a steady cash flow, but it concludes different currency values => present value is calculated by

1 1

4.2 Bond valuation

4.2.1 Definition and basic bond valuation formula

4.2.2 Variables reflecting bond yield

4.2.3 Measure the change in price of bond without option

4.2.1 Definition and basic bond

valuation formula

• Bond valuation is determining present value of

receipts expected to generate from bonds in the future.

• P =

• P: the bond value

• n: the number of times for payment of interest

• C :Bond interest paid in the n th period

• r: the expected interest rate of investors

n

r

M r

C r

C r

C r

2 1

n

Bond valuation formula when the bond interest rate is fixed:

r C

P

r

M r

C P

C C

C C

1 1

1

3 2

1

Zero-coupon bond valuation formula:

 n

r

M P





1

Coupon interest rate:

Coupon interest rate is the interest rate

calculated based on par value which the issuer of a bond agrees to pay each year

to the bondholder

Current interest rate

• Measure yield rate of a bond at a time

• If price of current bond is equal to its par value : current interest rate = coupon interest rate

• If price of current bond > (<) its par value : current

interest rate < (>) coupon interest rate

P C

CY 

Yield to maturity (YTM)

• The rate of return anticipated on a bond if it is held until the maturity date

   

YTM y

y

M y

Internal Rate of Return – IRR

• The discount rate often used in capital budgeting that makes the net present value of all cash flows from investment equal to zero.

1 1

Relationship among coupon interest rate, required interest rate and price

• Coupon interest rate< required interest

rate: price < par value

• Coupon interest rate > required interest

rate: price > par value

• Coupon interest rate = required interest

rate: price = par value

4.3 Stock valuation

Dividend Discount Model (DDM)

• Value of common share is the present value of all expected dividend cash flow in the future:

Dividend Discount Model in a limited time:

n n

t

t

r

P t

r

D P

The Dividend Discount Model

with No Growth

• D0 = D1 = D2 = … Di = D

r D

P0 

Constant – Growth Dividend Discount Model

• Supposing that dividends increase evenly

each year g %:

 r g 

D P



0

Model of temporary dividend growth

• Some companies overgrowth in a period then will come back to stable growth.

P r

D

n t

t

t o

Valuation according to P/E ratio

• If we know the branch average P/E or P/E of a company in the same branch with a similar yield rate, risk and chance of growth=> the price of share:

• Po = P/E branch x EPS

• Example : P/E branch is 12, EPS of the share A

is 2000 VND/share  the price of share is

24.000VND

Free Cash Flow Model (FCF)

• Go to

http://www.analystforum.com/samples/schweser/