Question Related To The Finance And Valuations

03 Oct Question Related To The Finance And Valuations

Blog can be of any topic but here we would look into some of the question related to the finance and valuations.

Valuation of bonds

Redeemable bond – yield calculation

Exercise 1

A bond is redeemable in the year 2016.

The current price is £97 per £100

Interest rate is 5%

What is the current yield?

Year Cash flows 5% discount 10% discount
2012 0 (97) 1.000 (97.00) 1.000 (97.00)
2013 1 5 0.952 4.76 0.909 4.55
2014 2 5 0.907 4.54 0.826 4.13
2015 3 5 0.864 4.32 0.751 3.76
2016 4 105 0.823 86.42 0.683 71.72
3.04 (12.84)

5% + (((3.04/(3.04+12.84)) x (10-5)) = 5 + 0.96 = 5.96%

Exercise 2

A bond is redeemable in the year 2015

The current price is £106 per £100

Interest is 8%

What is the current yield?

Year Cash flows 8% discount 3% discount
2012 0 (106) 1.000 (106.00) 1.000 (106.00)
2013 1 8 0.926 7.41 0.971 7.77
2014 2 8 0.857 6.86 0.943 7.54
2015 3 108 0.794 85.75 0.915 98.82
(5.98) 8.13

3% + (((8.13/(8.13+5.98)) x (8-3) = 3 + 2.89 = 5.89%

Valuing bonds

As interest rates rise – the value of bonds reduces

As interest rates fall – the value of bonds increases

Example – what is the value of a 5% bond maturing in 4 years time if current interest rates are 4% and 6%?

Year Cash flows 4% discount 6% discount
2012 0
2013 1 5 0.962 4.81 0.943 4.72
2014 2 5 0.925 4.63 0.890 4.45
2015 3 5 0.889 4.45 0.840 4.20
2016 4 105 0.855 89.78 0.792 83.16
103.67 96.53

5 x 2.775 = 13.875 5 x 2.673 = 13.365

105 x 0.8555 = 89.775 105 x 0.792 = 83.16

103.65 96.53

 

Risk

CAPM – Capital Asset Pricing Model

An investor requires a return of 14%

The market return is 10%

The return of treasury stock (government bonds) is 2%

What is the beta factor and measure of risk?

14 = 2 + B(10 – 2 )

14 – 2 = B(8)

12/8 = B

B = 1.5

Share valuation

The dividend growth model

(Di /P) + g

If Di is 5p

g = 10%

You expect a return of 15.75%

How much would you be prepared to pay for the share?

Di/p + g

5/P + 10% = 15.75%

5/P = 0.1575 – 0.10

5/P = 0.0575

5/0.0575 = 87p



live support software