1. Securities valuation (Chapter 5&7)

2. Topics Bond: Common stock valuation Preferred stock valuation
Bond valuation -- annual, semiannual coupon payments
YTM, YTC, current yield, capital gain (loss) yield
Common stock valuation
Constant growth stock
Zero growth stock
Non-constant growth stock
Preferred stock valuation

3. Bond Long-term debt instrument Par value Coupon interest rate Maturity
Zero coupon, floating-rate
Maturity
Original, remaining
Call provision
Convertibility

4. Bond Valuation
Time line:

5. Bond Valuation 15-yr. bond, 10% annual coupon, $1,000 par If rd=10%
Par bond

6. Bond Valuation 15-yr. bond, 10% annual coupon, $1,000 par If rd = 15%
Discount bond
If rd = 5%
Premium bond

7. Bond Valuation
Figure 5-4 (p. 179)

8. Bond Valuation Bond with semiannual coupon payments:
15-yr. bond, 10% semiannual coupon payments, $1,000 par
If rd = 5%

9. Bond Yield Yield to maturity:
Bond with 14-year to maturity, 10% annual coupon, $1,000 par value, $1, price

10. Bond Yield Yield to call:
Callable bond price today is $1,494.93, 10% annual coupon. If the bond is called in year 9 at call price $1,100.

11. Bond Yield Current (interest) yield:
Purchased bond with 10% annual coupon a year ago at price of $713.78

12. Bond Yield Capital gain (loss) yield:
Purchased bond with 10% annual coupon a year ago at price of $ and sell at $ a year later.

13. Common Stock Valuation

14. Common Stock Valuation
Constant growth stock:
MicroDrive just paid $1.15 dividend (D0), investors expect dividend to grow at a constant rate 8% with 13.4% required rate of return.

15. Common Stock Valuation
Expected rate of return on constant growth stock:
If you buy MicroDrive’s stock for a price P0=$23 and if you expect the stock to pay dividend D1=$1.242 one year from now and dividend will grow at a constant rate g=8% in the future, then your expected rate of return will be 13.4%.

16. Common Stock Valuation
Zero growth stock:
MicroDrive just paid $1.15 dividend (D0), investors expect dividend to remain constant over time.
Assume investors require 13.4% rate of return

17. Common Stock Valuation
Non-constant growth stock:

18. Common Stock Valuation
Fig. 7-5

19. Preferred Stock Valuation
MicroDrive has preferred stock that pays annual dividend of $10.
Assume required rate of return is 10%