1、Estimate future cash flows:Size(how much)and Timing(when)Discount future cash flows at an appropriate rate:The rate should be appropriate to the risk presented by the security.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-35.1 Definition and Example of a Bond
2、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)McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,In
3、c.All rights reserved.5-45.1 Definition and Example of a BondConsider 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$31.87
4、5.On January 1,2002 the size and timing of cash flows are:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-55.2 How to Value BondsIdentify the size and timing of cash flows.Discount at the correct discount rate.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill
5、Companies,Inc.All rights reserved.5-6Pure Discount BondsInformation needed for valuing pure discount bonds:Time to maturity(T)=Maturity date-todays dateFace value(F)Discount rate(r)Present value of a pure discount bond at time 0:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All ri
6、ghts reserved.5-7Pure Discount Bonds:ExampleFind the value of a 30-year zero-coupon bond with a$1,000 par value and a discount rate of 6%.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-8Level-Coupon BondsInformation needed to value level-coupon bonds:Coupon pa
7、yment dates and time to maturity(T)Coupon payment(C)per period and Face value(F)Discount rateValue of a Level-coupon bond=PV of coupon payment annuity+PV of face valueMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-9Level-Coupon Bonds:ExampleFind the present va
8、lue(as of January 1,2002),of a 6-3/8 coupon T-bond with semi-annual payments,and a maturity date of December 2009 if the discount rate is 5-percent.On January 1,2002 the size and timing of cash flows are:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-145.4 The
9、 Present Value of Common StocksDividends versus Capital GainsValuation of Different Types of StocksZero GrowthConstant GrowthDifferential GrowthMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-15Case 1:Zero GrowthAssume that dividends will remain at the same lev
10、el foreverSince future cash flows are constant,the value of a zero growth stock is the present value of a perpetuity:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-16Case 2:Constant GrowthSince future cash flows grow at a constant rate forever,the value of a c
11、onstant growth stock is the present value of a growing perpetuity:Assume that dividends will grow at a constant rate,g,forever.i.e.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-17Case 3:Differential GrowthAssume that dividends will grow at different rates in
12、the foreseeable future and then will grow at a constant rate thereafter.To value a Differential Growth Stock,we need to:Estimate future dividends in the foreseeable future.Estimate the future stock price when the stock becomes a Constant Growth Stock(case 2).Compute the total present value of the es
13、timated future dividends and future stock price at the appropriate discount rate.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-18Case 3:Differential GrowthAssume that dividends will grow at rate g1 for N years and grow at rate g2 thereafter.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.5-19Case 3:Differential Growth Dividends will grow at rate g1 for N years and grow at rate g2 thereafter 0 1 2NN+1McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,I
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