ch10 Intro To Finance

Chapter Ten: Bonds and Stocks: Characteristics and Valuations
Chapter 10 Bonds and Stocks: Characteristics and Valuations

CHAPTER PREVIEW A natural application of the time value of money principles is stock and bond valuation. Students are familiar with the financial markets from news reports. This chapter allows them to learn some of the influences on stock and bond values. We first review bond characteristics the !lobal nature of the bond market and show how to interpret the price "uotes found in many newspapers. The basics of e"uity securities are reviewed ne#t. The second half of the chapter discusses valuation principles for bonds stocks and risk. $t also discusses how to compute rates of return. LEARNING OBJECTIVES stocks. Identify the major sources of external long-term financing for corporations. Describe major characteristics of corporate bonds. Identify the reasons why investors seek stocks for an investment vehicle. Describe major characteristics of preferred stock and common stock. Describe the process for issuing dividends by a firm. Explain how financial securities are valued in general and specifically for bonds and
Learning Extension: Calculate rates of return.
CHAPTER OUTLINE $. $$. %&'()T*+, *-T*+'A% .$'A'C$'( S&/+C*S .&+ B/S$'*SS*S 0*BT CA1$TA% A. Who Buys Bonds2 B. Bond Covenants C. Bond +atin!s 0. Bondholder Security *. Time to ,aturity .. $ncome from Bonds (. (lobal Bond ,arket 3. +eadin! Bond 4uotes C&+1&+AT* *4/$T5 CA1$TA% A. Common Stock B. 1referred Stock C. +eadin! Stock 4uotes 0. $nnovation in Common Stock 67)6
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0$V$0*'0S A'0 ST&C8 +*1/+C3AS*S A. 3ow 0o .irms decide on the 0ollar amount of 0ividends2 B. Stock 0ividends and Stock Splits C. Share +epurchases VA%/AT$&' 1+$'C$1%*S
V.
V$. VA%/AT$&' &. B&'0S A. 0eterminin! a Bond9s 1resent Value B. Calculatin! the 5ield to ,aturity C. +isk in Bond Valuation 6. Credit +isk :. $nterest +ate +isk ;. +einvestment +ate +isk <. +isks of 'ondomestic Bonds V$$. VA%/AT$&' &. ST&C8S A. Valuin! Stocks with Constant 0ividends B. Valuin! Stocks with Constant 0ividend (rowth +ates C. +isk in Stock Valuation V$$$. VA%/AT$&' A'0 T3* .$'A'C$A% *'V$+&',*'T A. (lobal *conomic $nfluences B. 0omestic *conomics $nfluences C. $ndustry and Competition S/,,A+5
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%*A+'$'( *-T*'S$&': A''/A%$=$'( +AT*S &. +*T/+' $. $$. 3oldin! 1eriod +eturns Annuali>ed +ates of +eturn
LECTURE NOTES $. %&'()T*+, *-T*+'A% .$'A'C$'( S&/+C*S .&+ B/S$'*SS*S $nternal financin! sources arise from a firm9s cash flow rou!hly defined as net income plus depreciation. *#ternal lon!)term financin! is obtained from the capital markets by sellin! debt and e"uity claims. The relative use of internal and e#ternal funds varies over the business cycle. Table 67.6 presents data on the absolute and relative use of securities used to raise e#ternal financin!.
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,ost financial claims sold to the public are debt claims. This occurs for several reasons: 6. .irms prefer to use internal e"uity ?e.!. retained profits@ rather than e#ternal e"uity. :. $t is cheaper to borrow funds than sell e"uity. ;. Bonds matureA e"uity does not. Both bonds and stock can be sold to the public or in a private placement. .or lar!e firms !lobal markets e#ist for sellin! these claims. There are four reasons why more and more firms are raisin! funds outside of the /.S.: 6. $f firms have overseas plants or factories it may make financial sense to raise funds in the country in which the plant is built ?to hed!e cash flows and to miti!ate political risk@. :. .inancin! costs may be lower overseas. ;. Securities issued outside of the /.S. can avoid the costly and time)consumin! S*C approval process. <. $n order to find sufficient buyers for lar!e bond offerin!s issuers seek access to !lobal capital markets. ?/se 0iscussion 4uestions 6 throu!h ; here.@ $$. 0*BT CA1$TA% ,uch of this section entails introducin! students to various terms associated with bonds. This can be made livelier by circulatin! ?or showin! them on an overhead proBector@ copies of various Ctombstone adsD from he !all "treet #ournal to show students how some of the terms are used. 0ebt issued in the /.S. is in re!istered form. Typical corporate bonds have a E6 777 face or par value a set maturity date and pay coupons twice a year. The bond contract between the issuer and investors is called the indenture and is overseen by a trustee. Covenants help protect investors. .irms usually pay to have the bonds rated by an outside a!ency to evaluate their credit risk. The bond ratin! will be affected by the firm9s ability to pay timely interest and principal and the bond9s security provisions i.e. whether it is collaterali>ed is a mort!a!e bond e"uipment trust certificate debenture or subordinated debenture. Some bonds may contain other featuresA they may be convertible callable putable e#tendible or they may have a sinkin! fund re"uirement. 'ewer innovations in bonds include asset securiti>ation ?issuin! bonds whose coupon and principal payments arise from another e#istin! cash flow streamA e.!. mort!a!es credit card receivables auto loans and royalties@ and inflation)protected securities. Securities in the !lobal bond market include *urodollar bonds which are dollar)denominated bonds sold outside of the /nited States and 5ankee bonds which are dollar)denominated bonds that are issued in the /.S. by a forei!n issuer. Bond ratin!s provide information about an issuer9s ability to service its debt. Bond covenant provide rules the issuer must followA they !enerally provide protection for investors. Bonds can differ on the de!ree of security they offer investors factors that affect their time to maturity and how they pay income to investors. The !lobal bond market provides !reater access to financial capital than can be e#pected in any one domestic market. 67);
?/se 0iscussion 4uestions < throu!h 6: here.@ $$$. C&+1&+AT* *4/$T5 CA1$TA% *"uity ownership is indicated by possessin! a stock certificate althou!h some investors prefer to keep their certificates in street name. *"uity securities fall into two classes: 6. Common stock provides for a residual claim on profits after debt and preferred shareholders have been paid their claims. :. 1referred stock !enerally carries a specified dividend e#pressed either as an absolute dollar amount or as a percent of par. 1referred stock can be convertible callable or cumulative. ?/se 0iscussion 4uestions :: :; :F and :G here.@ $V. 0$V$0*'0S A'0 ST&C8 +*1/+C3AS*S $ncome to shareholders comes in the form of dividends that are declared by the firm9s board of directors. Be!innin! students of finance or business will find the process of ?in their mind@ !ettin! Cfree moneyD from a corporation interestin!. After all without a le!al contract ?as with bonds@ why !ive the firm9s money to shareholders2 This section thou!h lar!ely descriptive can lead to !ood discussions on why firms pay dividends the process for determinin! the amount of dividends and the differences between cash dividends stock dividends and stock splits and share repurchases. Class discussion can be helped by findin! on the internet or financial periodical announcements by firms of dividend declarations or share repurchases. ?/se 0iscussion 4uestions :< ;6 and ;: here@. V. VA%/AT$&' 1+$'C$1%*S $ntroduces the !eneral principle that value arises from discountin! e#pected future cash flows. ?/se 0iscussion 4uestion 6; here.@ V$. VA%/AT$&' &. B&'0S Applies valuation principles to determinin! the price of a strai!ht bond price H 1V?e#pected future cash flows@ H 1V?coupon payments@ I 1V?principal@ Bonds sellin! below par value are discount bondsA bonds with prices above par value are premium bonds. Bond prices and interest rates are inversely relatedA when one rises the other must fall by nature of the discountin! process. $f a bond9s price is known its yield to maturity can be found by usin! an appro#imation formula. An e#act answer can be found by usin! a financial calculator or spreadsheet. 67)<
When coupons are paid semiannually care must be taken to compute interest rate r. +ecallin! the discussion from Chapter G the yield to maturity on a bond is computed as an effective interest rate ?*A+@: 5T, H ?6 I r@: J 6 or r H ?6 I 5T,@6K: J 6 Bonds can be risky investments. Their cash flows returns and market prices are affected by credit risk interest rate risk and reinvestment rate risk. /.S. investors of non) /.S. bonds are subBect to political risk and e#chan!e rate risk. ?/ses 0iscussion 4uestions 6< throu!h :6 here.@ V$$. VA%/AT$&' &. ST&C8S The price of a share of stock today is the present value of future e#pected dividends re!ardless of the len!th of a particular investor9s holdin! period. Stock valuation formulas are presented for stocks with constant dividends ?such as preferred stock@ a constant dividend !rowth rate and a two)sta!e dividend !rowth model. As they represent a residual claim on earnin!s and assets stock investments are riskier than bond investments. The price of a stock is affected by the si>e of the dividend future !rowth in the dividend the level of interest rates e#pected inflation and the level of perceived risk in the investment. ?/se 0iscussion 4uestions :L throu!h :M ;7 ;; throu!h ;L here.@ V$$$. VA%/AT$&' A'0 T3* .$'A'C$A% *'V$+&',*'T We estimate present value by usin! future e#pected cash flows and discount rates. This section introduces several economic influences on stock and bond valuation that may affect a firm9s cash flows or how investors want to discount those cash flows. Two maBor !lobal influences can affect cash flows and discount rates: 6@ the condition of overseas economies as they can be a source of demand for home country e#portsA :@ chan!es in e#chan!e rates can affect the cash flows that firms receive and can influence as we saw in Chapter N the level of home country interest rates. 0omestic economic conditions affect personal spendin! business investment and the returns that investors will re"uire on their investments. Some industries are more sensitive to chan!es in economic factors than others. The level and type of competition in an industry and a firm9s market position will influence its future cash flows and discount rate. ?/se 0iscussion 4uestions ;N throu!h <6 here.@ SUPPLEMENTAR MATERIAL
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Based upon how you which to teach your course you may find the topics below of interest to you and your students. $t is set)up on separate pa!es for easy copyin! and distribution to your students. PROCESS O! ISSUING CASH "IVI"EN"S As dividend payments are not CautomaticD in the sense of bond interest there is a process to be followed. .irst the firm9s board of directorsOwho oversee the firm9s mana!ers and who are to make decisions for the benefit for the firm9s common shareholders6Omust declare that a cash dividend will be paid. &n this declaration date they will announce the amount of the dividend per share that will be paid on the distribution date to those who own stock as of the date of record. The time line of this process is shown in .i!ure $,67.6. margin definition: declaration date the date the board of directors announces that a dividend is declared$ or is forthcoming distribution date date on which the dividend is to be paid to shareholders date of record those owning the stock on this date will receive the declared dividend on the distribution date The board declares that a dividend will be paid on the declaration date for e#ample ,arch 6. The announcement will include information on the amount of the dividend and when the dividend will be paid ?the distribution date which is ,ay 6 in .i!ure $,67.6@. The board will also announce the date of record dividends will only be paid to those who own shares of the firm9s stock on this date. $n .i!ure F.; shows the date of record as April :. margin definition: ex-dividend date two working days before the date of record$ trades on and after this trade do not include the right to receive the declared dividend We learned earlier that stock trades are processed in CTI;D that is it takes up to three days before a stock purchase or sale is recorded. Thus our time line needs one more date: the exdividend date. The e#)dividend date is two workin! days before the date of record. Stock trades on or after the e#)dividend date will not include the e#pectation of the dividend. $n our timeline assumin! that April : falls on a Wednesday the e#)dividend date will be two workin! days before that is ,onday ,arch ;6. Anyone wantin! to purchase shares in order to receive the dividend needs to purchase them before ,arch ;6. What should happen to the stock price on the e#)dividend date2 $f there were no other influences we would e#pect the price of the stock to fall by an amount e"ual to the dividend. $f stock is tradin! for E:M.L7 with a declared "uarterly dividend of E7.;7 we e#pect the price to fall to E:M.:7 on the e#)dividend date.
The board of directors is discussed more fully in Chapter 66 Business &r!ani>ation and .inancial 0ata.
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))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 0eclaration 0ate ,arch 6 *#)0ividend 0ate of 0ate +ecord ,arch ;6 April : 0istribution 0ate ,ay 6
!ig#re IM$%&$ Ti'e (ine )or *e+(aring an* iss#ing a +as, *i-i*en* ))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Why do some firms offer stock dividends or do stock splits2 Since they have no value effects the impact is mainly psycholo!ical. Stock dividends are a way to make investors think they are receivin! somethin! of value when in reality they are not. Some practitioners believe there is an optimal ran!e for a stock price. 1rices that are Ctoo hi!hD will scare away investors because of the lar!e capital investment needed to purchase shares. 1rices that are Ctoo lowD make the stock appear speculative. Stock dividends and splits can reduceKincrease market prices to keep them within an optimal ran!e of E:7)EF7. But many successful firms have stock prices far e#ceedin! this ran!eA in :77M (oo!le stock was sellin! for over EL77 a share and Berkshire 3athway A shares have traded at over E677 777 a share. Stocks with low prices ?say less than EL a share@ do have a sti!ma of bein! lower "uality speculative issues and some have done reverse splits to raise their stock price. But research studies show what we intuitively know: there is no shareholder value created in splits reverse splits and stock dividends. TWO.STAGE GROWTH MO"ELS The assumption of a smooth constant !rowth rate over time may not be true for some firms. The firm and industry life cycle is such that a period of fast and variable !rowth is followed by a period of slower more consistent !rowth. And cyclical firms will have !rowth rates that fluctuate with the business cycle. &ne way to address this reality is to use a two)sta!e !rowth model. The model assumes supernormal !rowth will occur for the firm over a short period of time after which CnormalD and relatively constant !rowth will occur.: To value these stocks we
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Some use a three)sta!e !rowth model in which a period of supernormal !rowth is followed by a period of above)normal but declinin! !rowth rates until a sustainable constant !rowth rate is achieved. 67)M
use: 17 H P07?6 I !@QK?6 I rs@ I P07?6 I !@:QK?6 I rs@: R S R P07?6 I !@nQK?6 I rs@n I 1ricenK?6 I rs@n ?$,67)6@
That is we estimate the dividends for each year of the n)year supernormal !rowth period and compute their present valueA we add to this the present value of the stock price in year n. The year n price is estimated by the constant dividend !rowth modelA since dividends are e#pected to !row at a consistent rate after year n we find their value as of year n and discount it back to the present. Without the notation of e"uation $,67)6 the process is: 6. *stimate the dividends for each year of the supernormal !rowth periodA :. Since constant !rowth be!ins in year n I 6 find the price of the stock in year n usin! the (ordon modelA ;. Sum the present value of the dividends in each of the supernormal !rowth years and the present value of the stock price in year n. As an e#ample let9s assume 8raham Corporation9s stock is in a !rowth periodA dividends are e#pected to !row :7 percent annually for the ne#t three years at which time the firm will !row at a CnormalD rate of M percent. $f investors re"uire a 67 percent return on their investment in a stock with 8raham9s risk and the firm Bust paid a dividend of L7 cents a share what is a fair price for the stock2 The first step is to estimate the dividends in the supernormal !rowth period. With a current dividend of E7.L7 and :7 percent !rowth these dividends are: 5*A+ 6 : ; 0$V$0*'0 ?7.L7@?6 I 7.:7@ H E7.N7 ?7.N7@?6 I 7.:7@ H E7.M: ?7.M:@?6 I 7.:7@ H E7.FN
The second step is to estimate the stock price in year ;. After year ; the dividends are e#pected to !row at a normal !rowth rate of M percent. /sin! the constant dividend !rowth model we find 1n H 0nI6K?rs ) !@ H 1; H 0<K?rs ) !@ H E7.FN?6 I 7.7M@K?7.67 ) 7.7M@ H 7.G:K7.7; H E;7.NM The third and final step of the process is to sum the present values of the supernormal !rowth dividends and the year); price at the 67 percent re"uired rate of return for 8raham stock. We have: 17 H E7.N7K?6.67@ I E7.M:K?6.67@: I E7.FNK?6.67@; I E;7.NMK?6.67@; H E:<.F; Accordin! to the two)sta!e model investors should be willin! to pay E:<.F; a share for 8raham Corporation stock. A simple spreadsheet desi!n can incorporate the inputs and calculations for this three)year 67)F
supernormal !rowth stock.
/sin! this spreadsheet if we chan!e the supernormal !rowth assumption ?cell BL@ to ;7 percent the stock should trade at E;6.LL a share. &r leavin! the !rowth rate assumption at :7 percent if we chan!e the lon!)term dividend !rowth to only L percent ?cell BM@ the stock should sell for E6L.<:. "ISCUSSION /UESTIONS AN" ANSWERS 6. Describe the relationship between internal and external financing in meeting the long-term financial needs of a firm. $nternal financin! takes place as retained earnin!s and internally !enerated cash flows such as depreciation are committed to operatin! assets. Some firms either because of very hi!h internal cash !eneration or slow !rowth may depend entirely upon internal financin!. &ther firms may have to !o to the markets with !reat fre"uency to meet their capital needs. Thus the internal versus e#ternal financin! relationship is dependent on the availability of retained earnin!s versus the si>e of plant and e"uipment investments. %. !hat are the major sources of long-term funds available to business corporations& Indicate their relative importance. 67)G
$nternally !enerated funds arise from the firm9s retained cash profits and depreciation. *#ternal funds are obtained from debt ?e.!. bonds@ and e"uity ?preferred stock common stock@ markets. Such debt and e"uity claims can be sold to the public or can be privately placed. Businesses raise more funds from debt than e"uityA more common stock is issued than preferred. Banks loans are an important source of intermediate)term funds. '. !hy would firms raise capital in markets other than their domestic or home market& There are four reasons why a firm would raise funds outside of its domestic market. .irst if the firm has overseas factories or facilities it may make !ood financial sense to raise funds in the country in which the facility e#ists. Second financin! rates are sometimes lower outside the home market. Third if the /.S. is the home market raisin! funds outside of the /.S. eliminates the costly and sometimes len!thy S*C approval process. .ourth the si>e of some issues su!!ests !oin! outside the home market in order to find a sufficient number of buyers. <. Can bonds be purchased only by large institutional investors& Explain. 'o. Althou!h institutions such as pension funds life insurance firms and mutual funds make up much of the market for debt individual investors can purchase corporate and Treasury bonds. The Treasury 0irect pro!ram is desi!ned to help individuals purchase Treasury securities. Corporate debt can be purchased by individuals via brokersA some corporate issues ?Smart 'otes medium)term notes or direct access notes@ are marketed directly to the retail investor. (. )ow does a I*" bond differ from the typical +.". reasury security& The typical /.S. Treasury note or bond pays the same coupon interest over its life and has a par value which is unchan!in!. T$1S ?Treasury inflation)protected security@ have a coupon payment and par value which rises with inflation. The stated interest rate on a T$1S is the real interest rateA the coupon income the investor received increases above the real rate by the rate of inflation. ,. Describe what is meant by bond covenants. Covenants impose additional restrictions ?ne!ative covenants@ or duties ?positive covenants@ on the firm. *#amples of positive covenants include maintainin! a minimum level of workin! capital and submittin! audited financial statements to bondholders. *#amples of ne!ative covenants include restrictions on the amount of a firm9s debt or limits on dividends. -. !hat are bond ratings& Bond ratin!s are purchased by a firm issuin! bonds in order to have a third party ?the bond ratin! a!ency@ evaluate the credit or default risk of a bond issue. The ratin!s inform the markets of the safety of the issue. The raters assess both the ability of the issuer to make timely interest and principal payments as well as the collateral and covenants specified in the bond indenture. .. /riefly describe the types of bonds that can be issued to provide bondholder security.
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*#amples include collaterali>ed bonds ?backed by securities such as mort!a!es or credit card receivables@ mort!a!e bonds ?backed by property plant or e"uipment@ and e"uipment trust certificates ?backed by rollin! stock such as railroad cars or airplanes@. 0. !hat is meant by the following terms1 convertible bonds$ callable bonds$ putable bonds$ and Eurodollar bonds& Convertible bonds can be chan!ed or converted at the investor9s option into a specified number of common shares. Callable bonds can be redeemed prior to maturity at par value plus a call premium at the issuer9s option. 1utable bonds allow the investor to force the issuer to redeem the bonds prior to maturity. *urodollar bonds are dollar)denominated bonds that are sold outside the /.S. 23. !hy are investment-grade bonds given that name& !hy are 4junk bonds5 also known as 4highyield bonds5&
Bonds rated BBB or hi!her are called Cinvestment)!radeD as institutional investors such as pension plans have historically limited their bond investments to hi!her)rated bonds. CTunk bondsD those with ratin!s below investment)!rade have hi!her yields due to their hi!her riskOso they are sometimes called Chi!h)yieldD bonds. 22. !hy might a firm want to maintain a high bond rating& !hat has been happening to bond ratings in
recent years&
There are two reasons why a firm mi!ht want to maintain a hi!h bond ratin!. .irst was the presti!e associated with havin! a hi!h bond ratin!. Such firms are thou!ht of bein! financially stable well)mana!ed and mi!ht attract a number of institutional and individual investors. Second a hi!h bond ratin! saves the firm money by allowin! it to have lower interest e#penses on its bond debt. &ver time the sti!ma associated with hi!h)yield or Bunk debt has diminished. $nterest is ta#) deductible whereas dividends are notA firms have issued debt to fund stock repurchase pro!rams. &ver time the percenta!e of investment)!rade debt has fallen and the percenta!e of CBunkD debt has risen. 2%. !hy might an investor find a 6ero-coupon bond an attractive investment& ,any bond investors have lon!)term time hori>ons before the invested funds are needed ?to pay for a child9s colle!e education personal retirement or other financial !oals@. Such investors will not spend the bond9s coupon interest when it is receivedA they will re)invest it in other securities. When re!ular bonds are purchased by these investors they face the risk of not knowin! what the return will be on the re)invested coupons over the life of the bond. $nterest rates may rise fall or cycle up and down over the life of the investment. =ero coupon bonds eliminate this uncertainty by in essence lockin! in the return ?the difference between the price paid and the par value@ when the bond is purchased. Since interest is ta#ed annuallyOalthou!h it is not received until maturityO>ero coupon bonds are best suited for ta#)deferred investments such as $+As and L:G colle!e savin!s plans. 2'. /riefly describe how securities are valued. .uture cash flows are estimated. The security9s value or price is the present value of these cash flows discounted at an appropriate discount rate. 67)66
27. Describe the process for valuing a bond. Determining the value of a bond is a three-step process1 .irst we must find the present value of the coupon payments. The annual coupon payment is the coupon rate multiplied by the par value. $f interest is paid semiannually this amount is divided in half and the resultin! amount is paid every si# months. The time hori>on is the number of years until maturity for a bond with annual coupon payments and the number of years times two for a bond with semiannual coupons. The discount rate is the periodic rate determined by whether the yearly rate is "uoted on a nominal ?A1+@ basis or effective yield ?*A+@ basis. Second the present value of the par value is computed usin! the same number of periods and periodic rate as that used for the coupons. Third the sum of the present value of the coupons and the present value of the par value is the price of the bond. 2(. !hat is meant by the 4yield to maturity5 on a bond& $t is the return on a bond investment if the bond is held to maturity if all the coupon payments are reinvested at the yield to maturity and there are no ta#es to be paid. 2,. /riefly describe the types of risk faced by investors in domestic bonds. 8lso indicate the additional risks associated with nondomestic bonds. 0omestic bond risks include credit or default risk interest rate risk and rollover risk. Credit risk is the chance of not havin! timely payment of interest or principal. $nterest rate risk is characteri>ed by the Cseesaw effectDOchan!es in interest rates in one direction lead to chan!es in bond prices in the opposite direction. +einvestment or rollover risk is the risk that interest rates may fall harmin! the returns earned on reinvested coupons or principal. 'ondomestic bond investors have at least two other risks: e#chan!e rate risk ?fluctuatin! e#chan!e rates lead to varyin! /.S. dollar cash returns@ and political risk ?blocked currencies social unrest in the forei!n country@. 6M. !hat risk does a 6ero-coupon bond address& +einvestment rate risk as there are no intermediate cash flows to reinvest in other securities. 6F. 8ccording to the behavior of interest rates in 9igure 23.($ were investors more concerned or less concerned about risk over the %33%-%33, time period& Explain. The narrowin! ?spread become smaller@ between the Baa corporate bonds and Treasury bonds shows investors were becomin! less concerned about risk over this time frame. Similarly the spread or risk premium between Aaa corporates and Treasuries fell. .allin! risk premiums as indicated in this part of the fi!ure implies less investor concern about risk. 6G. !hat does it mean with the hori6on spreads in 9igure 23.- dip below the :-axis& !hy do some feel that this was not to be the case in %33,& When hori>on spreads are ne!ative the yield curve is investedOthat is lon!)term bond rates are less than shorter term bond rates. This typically happens before a recession be!ins when short)term rates are risin! because of inflationary pressures at the time. Some e#perts feel however that the inverted yield curve in :77N does not predict a soon)comin! recession. They ar!ue that easy monetary policy both in the /.S. and world)wide created a !reat deal of li"uidity in the financial markets. $ndeed in :77N and early :77M there was no si!n of a 67)6:
restrictive monetary policy by the .ed and credit spreads ?see .i!ure M.;@ remained low. $f investors feared a soon)comin! recession credit spreads would widen due to a fli!ht to "uality. %3. )ow do you think credit spreads behave over the course of the economic cycle& Credit spreads are a risk premium between hi!h)"uality ?low credit risk@ bonds such as Treasuries or AAA)rated corporate bonds and lower)"uality ?hi!her credit risk@ bonds such as BBB) or Baa)rated corporates. $n periods of economic !rowth and risin! optimism spreads will narrow as investors will not be as concerned about risk and will be willin! to seek hi!her yields in hi!her credit risk bonds. As economic uncertainty rises however over an economic slowdown or political uncertainty there will be a Cfli!ht to "uality.D $nvestors will prefer the perceived safety of lower credit risk securities and credit spreads will widen. $n !eneral we e#pect spreads to narrow in periods of economic !rowth and to widen in periods of slower economic !rowth. %2. !hat is a 4flight to ;uality5& +nder what economic conditions might we see this& A fli!ht to "uality occurs when investors become nervous about future economic conditions. %ess willin! to take risks they pull their funds from hi!her)risk investments and place them in securities that are perceived to be safer such as hi!h)"uality corporate bonds federal a!encies and Treasury securities. This can be precipitated by fears of a comin! recession political uncertainty in a country or economic uncertainty caused by for e#ample risin! oil prices inflation or widespread labor strikes. 3i!her credit risk securities will be perceived to have a much !reater chance of default as we enter a recession so investors will opt for safer securities.
%%. !hy study stocks if the net amount of stock issues is negative&
.irst they are a source of new financin! for new and !rowin! firms. Both private and public e"uity can be issued to meet the needs of such firms. .or investors in !eneral e"uity investin! is the best means available for participatin! in the returns ?and risks@ of corporate wealth creationOshare prices will reflect e#pectations and results in terms of profitability market share !rowth and mana!erial decisions. %'. !hy should investors consider common stock as an investment vehicle if they have a longterm time hori6on& An analysis of returns on an after)ta# after)inflation basis shows that common stocks have earned positive returns over time. &ther securities such as Treasury bonds have lower after)ta# returns while others ?such as T)bills have lost money after calculatin! real after) ta# returns. %7. !hy does dividend income growth exceed that of bond income growth over a period of time& 0ividends can !row alon! with a companyOrisin! sales and profits can lead to increases in dividends paid to increases in payments to the firm9s ownersOits common shareholders. Bonds have contractually determined payments ?coupon interest@ which are typically fi#ed durin! the bond9s life. Coupon rates will rise and fall with the !eneral trend of interest rates as new bond issues are sold but e#cept for convertible bonds ?which comprise a small fraction of all bond issues@ they do not participate in a firm9s !rowth in cash flows over time. 67)6;
%(. !hat is a capital gain& Is it taxed the same way as dividends& A chan!e in an asset9s price results in a capital !ain ?if its price rose@ or a capital loss ?if its price fell@. /nlike dividends capital !ains are not ta#able until the asset is sold and the !ain is Creali>ed.D Capital !ains ta# rates ?per the :767 ta# code@ are lower than ordinary income ta# rates but are similar to those paid on "ualifyin! dividends. %,. 4 axes on capital gains can be deferred.5 Explain what is meant by this statement. $f you buy a stock any increase in the price of that stock is not ta#ed until the stock is sold. 5ear)by)year increases in value are not ta#able each year ?and neither do any losses reduce ta#able income@. &nly when the asset is sold does the !ain ?or loss@ become Creali>edD and ta#es are owed. $f the asset is not sold the ta# implications of any !ains or losses are postponedOor deferred. %-. Explain how a capital loss on the sale of a firm<s stock can affect an investor<s taxes. $f an investor sells an asset at a capital loss the loss can be deducted from any capital !ain before ta#es are calculated. This has the potential effect of reducin! or eliminatin! any ta# on the investor9s capital !ains. Suppose stock A is sold with a lon!)term capital !ain of E6 777 and stock B is sold with a lon!)term capital loss of EN77. The net lon!)term capital !ain for the investor will be E6 777 ) EN77 H E<77. The investor will pay ta# at either the LU or 6LU mar!inal rate on the E<77 net lon!)term capital !ain. $f the investor had total lon!)term capital losses of E6 777 the net lon!)term capital !ain would be >ero and no capital !ains ta#es would be owed. %.. !hat is a round lot of common stock& A round lot e"uals 677 shares. Commissions are lower when an investor trades in terms of round lots. .or hi!h)priced issues ?such as Berkshire 3athaway@ a round lot will comprise 67 shares. %0. Describe some of the characteristics of common stock. Common stock represents ownership in the firm. Common shareholders can vote for the firm9s board of directors and other maBor issues as allowed by the firm9s charter. Common stock has a residual claim on the firm9s assets and earnin!s in case of bankruptcy. Some of the firm9s profits may be distributed to common shareholders if dividends are declared by the board of directors. The dividend can increase decrease remain stable or be eliminated. '3. =ist and briefly explain the special features usually associated with preferred stock. 1referred stock carries a fi#ed dividend e#pressed either as a dollar amount or as a percent of par value. They have a preference over common shareholders with respect to earnin!s and assets in case of bankruptcy. Shareholders have no votin! ri!hts e#cept in certain circumstances if dividends are missed. $t may be cumulative ?all dividends in arrears must be paid before common shareholders receive dividends@ or non)cumulative. 1referred stock can be convertible into shares of common stock or callable by the issuer. '2. )ow do firms decide how much of their earnings to distribute as dividends& 67)6<
There are several methods firms use. &ne is to maintain a tar!et dividend payout ratio ?dividends per share divided by earnin!s per share@ over time. $nvestors like predictabilityOso the board of directors will refrain from chan!in! the dollar amount of dividends per share by lar!e unsustainable amounts. $f the firm does have e#cess cash it decides to return to shareholders it can declare a special dividend or initiate a share repurchase pro!ram. $n addition to the sustainability of the level of dividends other considerations include !rowth opportunities facin! the firm ?should it reinvest in itself or distribute funds to shareholders@A the cost of other financin! sources such as debtA ta# rates on dividendsA and le!al considerations ?a firm cannot issue dividends if doin! so reduces its e"uity below the stock9s par value or if it will violate a bond or loan indenture in some manner. '%. Explain how an investor may view a stock dividend$ a stock split$ and a stock repurchase plan with regards to the value of his stock holdings. Stock dividends and stock splits should have no impact on firm valueA they are little more than accountin! entries adBustin! the number of shares outstandin! by the firm and the number of shares owned by an investor. A share repurchase plan is viewed positively as the firm is usin! funds to reduce the amount of shares outstandin!. /nder the laws of supply and demand this will increase the stock price above what it would be otherwise. Any !ains from stock price increases are deferred until an investor9s shares are sold. ''. Describe the process for valuing a preferred stock. Since the cash dividends of a preferred stock are similar in nature to a perpetuity they can be valued usin! the perpetuity relationship. This is usually done by dividin! the periodic dividend by the preferred shareholders9 re"uired rate of return. '7. Describe the process for valuing a common stock when the cash dividend is expected to grow at a constant rate. As lon! as the e#pected !rowth rate is less than the common shareholders9 re"uired rate of return the (ordon model or constant dividend !rowth model can be used. Today9s stock price is estimated by dividin! ne#t year9s e#pected dividend ?which is this year9s dividend increased by the !rowth rate@ divided by the difference between the shareholders9 re"uired return and the dividend !rowth rate. '(. Discuss the risks faced by common shareholders that are not related to the general level of interest rates. As stockholders have a lower priority than bondholders on a firm9s cash flows and assets any risk ?poor mana!ement decisions adverse chan!e in e#chan!e rates competitive pressures new products@ that reduces cash flows or the value of a firm9s assets is primarily borne by a firm9s shareholders. *thical lapses by mana!ement will harm a firm9s stock price. $n addition as the constant)!rowth model shows much of a firm9s stock value is due to e#pectations of future !rowth. $f !rowth e#pectations chan!e due to economic or product market factors the value of the stock will fall.
67)6L
',. +nder what economic forecast would you believe an auto manufacturer would be a good investment& 8 computer manufacturer& As the sales of auto manufacturers are typically related to the sta!e of the business cycle an economic forecast of continued !rowth ?business cycle upswin!@ may make an auto manufacturer an attractive investment. &ther helpful economic si!ns include for firms with lar!e overseas sales forecasts of hi!her !rowth in overseas economies and a weaker dollar. 3i!her !rowth overseas may help stimulate auto e#ports from the /.S. A weaker dollar will allow the auto manufacturer to a@ increase dollar cash flows from sales andKor b@ lower prices ?in terms of the forei!n currency@ without harmin! /.S. dollar cash flows. A desirable economic forecast for a computer firm is similar to that of an auto manufacturer. +isin! levels of income and sales associated with periods of economic !rowth will stimulate demand for computers for homes offices and for increased technolo!y in the assembly line for manufacturin! firms. Similarly overseas sales may be assisted by robust overseas economic !rowth and a weaker dollar. '-. Discuss how changes in exchange rates can affect the outlook for both global and domestic firms. Chan!in! e#chan!e rates may affect sales both at home and abroad. $f overseas suppliers or labor are used chan!in! e#chan!e rates may affect costs as well. $n !eneral a weakenin! home currency helps increase home currency cash flows from sales. .or e#ample a weakenin! dollar ?and a stron!er euro@ will help /.S.)based firms as euro sales are converted into more dollars as the stron!er euro can purchase more dollars. A weaker dollar can help domestic firms too as it may cause imports to rise in price as firms raise dollar prices in order to maintain their home)currency cash flows. $f a firm has a lar!e e#pense presence overseas a weakenin! currency can lead to hi!her e#penses ?for labor or supplies@ thus hurtin! profitability. $nterest)rate sensitive firms may be affected by stron!er or weaker home currencies if the chan!in! level of e#chan!e rates puts pressure on home country interest rates. A weakenin! home currency may lead to hi!her domestic interest rates. '.. !hat can looking at data on inventories tell us about the condition of the economy& Data on business expansion or investment plans& .irms produce inventories to sellA if sales rise inventories will fall. To maintain an appropriate level of supplies and finished product the firm may have to increase orders of raw materials pay overtime or hire additional workers and increase production. Thus fallin! inventories may indicate !rowin! consumer demand and continued economic !rowth. +isin! inventories can indicate a weakenin! economyA lower sales accompanied by risin! inventories may lead to supply cutbacks and worker layoffs. Business plans to e#pand or invest in plant and e"uipment are !ood si!ns for future economic !rowth. Businesses invest in themselves based upon the outlook for future sales and profitability. This investment will in turn help supplier firms construction firms and will keep workers fully employed. Cutbacks in business investment are an indication of slower economic !rowth or recession. '0. Is industry competition good or bad if you are looking for attractive stock investments&
67)6N
.irms that have some advanta!e over their rivals may be attractive stock investments. With a competitive advanta!e firms can maintain profitability throu!h hi!her prices hi!her sales volumes or lower e#penses. .irms that can protect themselves a!ainst revenue)lowerin! price competition or e#pense)raisin! non)price competition may be !ood investments if they are attractively priced. 73. >ive examples of firms you believe have been successful over time because they are industry leaders in ;uality? they are the low-cost producer? they are innovative? they offer superior customer service. The answer to this "uestion depends upon when it is bein! answered as firm9s fortunes do rise and fall over time. At the time of this writin! e#amples of "uality leaders include (eneral *lectric Cisco and 3ondaA e#amples of low)cost producers are Van!uard ?mutual funds@ Wal),art and /1SA e#amples of historically innovative firms are ;, and some pharmaceutical firms such as ,erck and Tohnson V TohnsonA e#amples of firms offerin! superior customer service may include .ed*# Vir!in Atlantic airlines and ,errill %ynch. 72. Energy prices are forecast to go higher. )ow would this affect your decision to purchase the stocks and bonds of a@ ExxonAobil& b@ 8merican 8irlines& c@ 9ord& d@ 8rcher Daniels Aidland$ a food processor& The investment decision will be affected by the current prices of these firm9s securities and the e#pected affect of hi!her ener!y prices on the firm9s profits and cash flows. a@ *##on,obil: as an oil e#ploration drillin! refinin! and distribution firm they will benefit as their sales revenues may rise while the costs of drillin! and refinin! oil should remain relatively constant. b@ American Airlines is a lar!e consumer of ener!yOit consumes hu!e amounts of Bet fuel. Their profits will fall due to hi!her fuel prices. c@ .ord may e#perience a shift in sales by ener!y conscious consumers from hi!her)profit mar!in trucks and S/Vs to lower)mar!in passen!er cars thus reducin! profits. d@ Archer 0aniels ,idland will likely face a profit s"uee>e too. As a food processor they purchase items from the a!ricultural sector which uses a !reat deal of ener!y in the farmin! fertili>in! and transportation process ?thus their raw materials prices may raise@. $n addition they will face hi!her costs as the process of convertin! a!ricultural products into food items is ener!y)intensive. PROBLEMS AN" ANSWERS 2. Compute the annual interest payments and principal amount for a reasury Inflation*rotected "ecurity with a par value of B2$333 and a '-percent interest rate if inflation is 7 percent in year 2$ ( percent in year %$ and , percent in year '. After the first year the par value rises by the inflation rate of <U to become E6777 ?6.7<@ H E67<7. The annual coupon interest will be ;U of par 7.7; # E67<7 H E;6.:7. $n the second year the par value rises by another LU: ?6.7L@?E67<7@ H E67G:. The second year9s coupon interest is ;U of this new par value: 7.7; # E67G: H E;:.MN and similarly in year ; with its inflation rate of NU: new par value H ?6.7N@?E67G:@ H E6 6LM.L:A interest H 7.7; # E66LM.L: H E;<.M; 1ar value E6 777 $nterest rate ;U 67)6M
5ear 6 : ; %.
$nflation 1ar value E6 7<7.7 <U 7 E6 7G:.7 LU 7 E6 6LM.L NU :
Annual coupon $nterest E;6.:7 E;:.MN E;<.M;
#udy #ohnson is choosing between investing in two reasury securities that both mature in five years and have par values of B2$333. Cne is a reasury note paying an annual coupon of (.3, percent. he other is a I*" which pays ' percent interest annually. If inflation remains constant at % percent annually over the next five years what will be #udy<s annual interest income from the I*" bond& 9rom the reasury note& Tudy9s annual interest from the Treasury note is a constant L.7NU of par or 7.7L7N # E6777 H EL7.N7. .or the T$1S the year 6 interest is based on the bond9s par value and :U inflation. At the end of year 6 the par value will be 6.7: # E6777 H E67:7 and its interest payment will be ;U of this par value: 7.7; # E67:7 H E;7.N7. This annual interest income will increase by the :U annual inflation rate durin! years :)L as seen in the followin! table. 1ar value E6 777 Treasury note L.7NU interest rate T$1S ;.77U interest rate Treasury note Annual coupon 1ar value interest E6 777 E6 777 E6 777 E6 777 E6 777 E6 777 EL7.N7 EL7.N7 EL7.N7 EL7.N7 EL7.N7 E:L;.77 T$1S Annual coupon inflatio n :U :U :U :U :U 1ar value E6 7:7.7 7 E6 7<7.< 7 E6 7N6.: 6 E6 7F:.< ; E6 67<.7 F E6 67<.7 F $nterest E;7.N7 E;6.:6 E;6.F< E;:.<M E;;.6: E6LG.:<
a.
5ear 6 : ; < L T&TA% +*C*$1TS
67)6F
b.
)ow much interest will #udy receive over the five years from the reasury note& 9rom the I*"& Treasury note: Tudy receives interest of EL7.N7 annuallyA over five years this total L # EL7.N7 H E:L;.77. T$1S: Summin! the interest payments computed in part a@ Tudy e#pects to receive interest payments of E6LG.:< over five years.
c. !hen each bond matures$ what par value will #udy receive from the reasury note& he I*"& The Treasury note has a par value of E6 777 which she received at maturity. The T$1S par value chan!es accordin! to the cumulative chan!e in the price level of the five years. $f inflation is :)percent annually the par value on the T$1S will be E6 67<.7F as shown in the previous table. $t can also be computed by compoundin! :U inflation annually on the initial E6777 par value: E6 777 # ?6.7:@L H E6 777 # 6.67<7F H E6 67<.7F. d. 8fter five years$ what is #udy<s total income Dinterest E par@ from each bond& "hould she use this total as a way of deciding which bond to purchase& Treasury note: &ver five years Tudy will receive E:L; in interest ?from part a@ plus E6777 par value for a total of E6:L;. T$1S: &ver five years Tudy will receive E6LG.:< in interest ?from part a@ plus E6 67<.7F par value ?from part c@ for a total of E6:N;.;:. 'o comparin! total funds received over the five)year time to maturity is not a !ood way to evaluate the bonds. By summin! the funds over time the effect of the time value of money is i!nored. An appropriate procedure would consider time value of money. '. +sing the regular reasury note of problem %? a. !hat is its price if investors< re;uired rate of return is ,.30 F on similar bonds& reasury notes pay interest semiannually. With a time to maturity of five years and coupons paid semiannually the number of periods is L # : H 67A the periodic rate is the semiannual rate which compounds to N.7GU: ?6 I r@: J 6 H 7.7N7G. Solvin! for r the periodic rate is ;.77 percent. The note9s coupon rate from problem : is L.7NU. The semiannual coupon income is 7.7L7N # E6777 divided by : or E:L.;7. /sin! the tables with an interest of ;U and 67 periods yields the followin! results: 1V of coupon interest annuity H E:L.;7 # F.L;7 H E:6L.F6 1V of par value H E6 777 # 7.M<< H EM<<.77 The price of the Treasury bond will be EM<<.77 I E:6L.F6 H EGLG.F6 /sin! a financial calculator the answer is: EGLG.G6 b. Erron Corporation wants to issue five-year notes but investors re;uire a credit risk spread of three percentage points. !hat is the anticipated coupon rate on the Erron notes& 67)6G
*rron9s notes will have a hi!her re"uired return because of hi!her default or credit risk. The e#pected re"uired rate of return on the five)year *rron notes e"uals the five)year Treasury note rate I credit risk premium H N.7G U I ;U H G.7GU. When debt securities are issued they are usually issued at a coupon rate close to the current market9s re"uired rate of return on securities of similar maturity and risk. Thus we e#pect *rron9s note coupon rate to be close to G.7GU. <. 8ssume a B2$333 face value bond has a coupon rate of ..( percent paid semiannually and has an eight-year life. If investors are willing to accept a 23.%( percent rate of return on bonds of similar ;uality$ what is the present value or worth of this bond& The periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.67:LA r H 7.7L or LU. The semiannual coupon is EFLK: H E<:.L7A the number of periods is F years # : or 6N periods. 1rice H E<:.L7 W 1V$.A?LU 6N@ I E6 777 W 1V$.?LU 6N@ H E<:.L7?67.F;F@ I E6 777?7.<LF66@ H EG6F.M: The *#cel command for computin! this is H1V?7.7L 6N <:.L 6777@. (. a. /y how much would the value of the bond in *roblem 7 change if investors wanted an .-percent rate of return& The periodic interest rate is the value of r such that ?6Ir@ : J 6 H 7.7FA r H 7.7;G:; or ;.G:;U. 1rice H E<:.L7 W 1V$.A?;.G:;U 6N@ I E6 777 W 1V$.?;.G:;U 6N@ H E<:.L7?66.M6G@ I E6 777?.L<7:M@ H E6 7;F.;: The *#cel command for computin! this is H1V?7.7;G:; 6N <:.L 6777@ 0ifference in price H E6 7;F.;: J EG6F.M: H E66G.N7 hi!her b. 8 bond with the same par value and coupon rate as the bond in *roblem 7 has 27 years until maturity. If investors will use a 23.%( percent discount rate to value this bond$ by how much should its price differ from the bond in *roblem 7& The periodic rate is the same as in problem < L percent. The number of periods is 6< # : or :F. 1rice of 6< year bond H E<:.L7 W 1V$.A?LU :F@ I E6 777 W 1V$.?LU :F@ H E<:.L7?6<.FGF@ I E6 777?.:LL7G@ H EFFF.:N The *#cel command for computin! this is H1V?7.7L :F <:.L 6777@ 0ifference in price H EG6F.M: J FFF.:N H E;7.<N lower N. he >arcia Company<s bonds have a face value of B2$333$ will mature in 23 years$ and carry a coupon rate of 2, percent. 8ssume interest payments are made semiannually. a. Determine the present value of the bond<s cash flows if the re;uired rate of return is 2,.,7 percent. The periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.6NN<A r H 7.7F or FU. The semiannual coupon is E6N7K: H EF7A the number of periods is 67 years # : or :7 periods. 1rice H EF7 W 1V$.A?FU :7@ I E6 777 W 1V$.?FU :7@ 67):7
H EF7?G.F6F@ I E6 777?.:6<LL@ H E6 777 The *#cel command for computin! this is H1V?7.7F :7 F7 6777@ b. )ow would your answer change if the re;uired rate of return is 2%.', percent& The periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.6:;NA r H 7.7N or NU. 1rice H EF7 W 1V$.A?NU :7@ I E6 777 W 1V$.?NU :7@ H EF7?66.<M7@ I E6 777?.;66F7@ H E6 ::G.<7 The *#cel command for computin! this is H1V?7.7N :7 F7 6777@. -. #udith$ Inc. bonds mature in . years and pay a semi-annual coupon of B((. he bond<s par value is B2$333. a. !hat is their current price if the market interest rate for bonds of similar ;uality is 0.%F& Assumin! the first cell is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used. Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity F.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate G.:7U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price b. <.L7U e"uals P?6 I BM@X?6KBL@Q minus 6 6N.77 e"uals B< Y BL ELL.77 (iven E6 66:.< F e"uals )1V?BG B67 B66 BN 7@
8 change in 9ed policy increases market interest rates 3.(3 percentage points from their level in part a. !hat is the percentage change in the value of #udith$ Inc. bonds from their value in part a& Assumin! the first cell is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used.
Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity F.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 67):6
,arket rate Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: c.
G.M7U ?*A+@ <.M<U e"uals P?6 I BM@X?6KBL@Q minus 6 6N.77 e"uals B< Y BL ELL.77 (iven E6 7F<.6 M e"uals )1V?BG B67 B66 BN 7@ ):.L<U
/etter profits for #udith$ Inc. reduces the market interest rate for its bonds to 0.3F. !hat is the percentage change in the value of #udith$ Inc. bonds from the answer in part b& Assumin! the first cell is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used.
Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity F.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate G.77U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: <.<7U e"uals P?6 I BM@X?6KBL@Q minus 6 6N.77 e"uals B< Y BL ELL.77 (iven E6 6:<.6 7 e"uals )1V?BG B67 B66 BN 7@ ;.NFU
.. Gamins Corporation has two bond issues outstanding$ each with a par value of B2$333. Information about each is listed below. "uppose market interest rates rise 2 percentage point across the yield curve. !hat will be the change in price for each of the bonds& Does this tell us anything about the relationship between time to maturity and interest rate risk& /ond 81 ( years to maturity$ .F coupon$ market interest rate is 0F /ond /1 2% years to maturity$ .F coupon$ market interest rate is 0F Assumin! the first cell in each analysis is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used.
67)::
1roblem F))ori!inal Bond A Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity L.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate G.77U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price <.<7U e"uals P?6 I BM@X?6KBL@Q minus 6 67.77 e"uals B< Y BL E<7.77 e"uals ?B; YBN@KBL EGNM.GL e"uals )1V?BG B67 B66 BN 7@
1roblem F))Bond A with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity L.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate 67.77U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: <.FFU e"uals P?6 I BM@X?6KBL@Q minus 6 67.77 e"uals B< Y BL E<7.77 e"uals ?B; YBN@KBL EG;6.LG e"uals )1V?BG B67 B66 BN 7@ );.MNU
1roblem F))ori!inal Bond B Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate G.77U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: <.<7U e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL E<7.77 e"uals ?B; YBN@KBL 67):;
Bond price
EG<6.77
e"uals )1V?BG B67 B66 BN 7@
1roblem F))Bond B with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate F.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate 67.77U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: <.FFU e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL E<7.77 e"uals ?B; YBN@KBL EFMM.7; e"uals )1V?BG B67 B66 BN 7@ )N.F7U
Based upon these answers lon!er time to maturity results in !reater bond price volatility for the same percenta!e point chan!e in the market interest rate. 0. /illon Corporation has two bond issues outstanding$ each with a par value of B2$333. Information about each is listed below. "uppose market interest rates rise 2 percentage point across the yield curve. !hat will be the change in price for each of the bonds& Does this tell us anything about the relationship between coupon rate and interest rate risk& /ond 81 23 years to maturity$ 3F coupon$ market interest rate is 0.,%F. /ond /1 23 years to maturity$ 23F coupon$ market interest rate is 0.,%F. Assumin! the first cell in each analysis is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used. 1roblem G))ori!inal Bond A Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate 7.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate G.N:U ?*A+@ Compute periodic interest rate: Compute number of periods: 67):< <.M7U e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL
Compute coupon cash flow: Bond price
E7.77 e"uals ?B; YBN@KBL E;GG.6: e"uals )1V?BG B67 B66 BN 7@
1roblem G))Bond A with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate 7.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 67.N:U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: L.6FU e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL E7.77 e"uals ?B; YBN@KBL E;N<.<M e"uals )1V?BG B67 B66 BN 7@ )F.NFU
1roblem G))ori!inal Bond B Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate 67.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate G.N:U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price <.M7U e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL EL7.77 e"uals ?B; YBN@KBL E6 7;F.<6 e"uals )1V?BG B67 B66 BN 7@
1roblem G))Bond B with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate 67.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 67.N:U ?*A+@ 67):L
Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e:
L.6FU e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL EL7.77 e"uals ?B; YBN@KBL EGMF.;F e"uals )1V?BG B67 B66 BN 7@ )L.MFU
Based upon these answers a lower coupon rate results in !reater bond price volatility for the same percenta!e point chan!e in the market interest rate. 23. Goppen Corporation has two bond issues outstanding$ each with a par value of B2$333. Information about each is listed below. "uppose market interest rates rise 2 percentage point across the yield curve. !hat will be the change in price for each of the bonds& Does this tell us anything about the relationship between fre;uency of cash flows and interest rate risk& /ond 81 his bond is a Eurobond. It has 23 years to maturity$ pays a -F coupon$ and the market interest rate is 22.'F. /ond /1 his is a issued in the +.". It has 23 years to maturity$ pays a -F coupon$ and the market interest rate is 22.'F. Assumin! the first cell in each analysis is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used. 1roblem 67))ori!inal Bond A Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 67.77 'umber of coupon payments per year 6.77 E6 777.7 1ar Value 7 ,arket rate 66.;7U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 66.;7U e"uals P?6 I BM@X?6KBL@Q minus 6 67.77 e"uals B< Y BL EM7.77 e"uals ?B; YBN@KBL EM<G.G: e"uals )1V?BG B67 B66 BN 7@
1roblem 67))Bond A with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ 67):N
Coupon +ate 'umber of years until maturity 'umber of coupon payments per year 1ar Value ,arket rate Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e:
M.77U 67.77 6.77 E6 777.7 7 6:.;7U ?*A+@ 6:.;7U e"uals P?6 I BM@X?6KBL@Q minus 6 67.77 e"uals B< Y BL EM7.77 e"uals ?B; YBN@KBL EM7<.6F e"uals )1V?BG B67 B66 BN 7@ )N.67U
1roblem 67))ori!inal Bond B Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate 66.;7U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price L.L7U e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL E;L.77 e"uals ?B; YBN@KBL EMN6.66 e"uals )1V?BG B67 B66 BN 7@
1roblem 67))Bond B with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 67.77 'umber of coupon payments per year :.77 E6 777.7 1ar Value 7 ,arket rate 6:.;7U ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: L.GMU e"uals P?6 I BM@X?6KBL@Q minus 6 :7.77 e"uals B< Y BL E;L.77 e"uals ?B; YBN@KBL EM6L.FL e"uals )1V?BG B67 B66 BN 7@ )L.GLU 67):M
Based upon these answers less fre"uent coupon payments ?onceKyear rather than twiceKyear@ result in !reater bond price volatility for the same percenta!e point chan!e in the market interest rate. 22. /H8 Inc. has two bond issues outstanding$ each with a par value of B2$333. Information about each is listed below. "uppose market interest rates rise 2 percentage point across the yield curve. !hat will be the change in price for each of the bonds& Does this tell us anything about the relationship between initial yield to maturity and interest rate risk& /ond 81 2% years to maturity$ pays a -F coupon$ and the market interest rate on this //rated bond is 2%.',F. /ond /1 2% years to maturity$ pays a -F coupon$ and the market interest rate on this 8rated bond is 23.%(F. Assumin! the first cell in each analysis is cell A6 the spreadsheet template on pa!e 6FL of the te#t can be used to solve thisA a financial calculator usin! the inputs below can also be used. 1roblem 66))ori!inal Bond A Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 6:.;NU ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price N.77U e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL E;L.77 e"uals ?B; YBN@KBL ENFN.:< e"uals )1V?BG B67 B66 BN 7@
1roblem 66))Bond A with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 6;.;NU ?*A+@ Compute periodic interest rate: Compute number of periods: 67):F N.<MU e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL
Compute coupon cash flow: Bond price 1ercenta!e chan!e:
E;L.77 e"uals ?B; YBN@KBL EN<:.FL e"uals )1V?BG B67 B66 BN 7@ )N.;:U
1roblem 66))ori!inal Bond B Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 67.:LU ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price L.77U e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL E;L.77 e"uals ?B; YBN@KBL EMG;.7: e"uals )1V?BG B67 B66 BN 7@
1roblem 66))Bond B with hi!her market rate Computin! Bond 1rice usin! *A+ ?effective annual rate@ Coupon +ate M.77U 'umber of years until maturity 6:.77 'umber of coupon payments per year :.77 1ar Value E6 777.77 ,arket rate 66.:LU ?*A+@ Compute periodic interest rate: Compute number of periods: Compute coupon cash flow: Bond price 1ercenta!e chan!e: L.<FU e"uals P?6 I BM@X?6KBL@Q minus 6 :<.77 e"uals B< Y BL E;L.77 e"uals ?B; YBN@KBL EM;G.N: e"uals )1V?BG B67 B66 BN 7@ )N.M;U
Based upon these answers the lower market interest rate results in !reater bond price volatility for the same percenta!e point chan!e in the market interest rate. 2%. !hat is the approximate yield to maturity Duse formula 23-'@ and the exact yield to maturity Duse a calculator@ for the following bonds& 8ssume these are bonds issued in the +.". .or each of these problems since we were not told otherwise we will assume a par value of E6 777 and semi)annual coupon payments. 67):G
a. 23 years to maturity$ ,F coupon rate$ current price is B0(3. Appro#imate 5T, H EN7 I ?E6777 J GL7@K67 H ENLKEGML H N.NMU ?E6777IGL7@K: .inancial calculator ?'H:7 1,TH;7 .VH6777 1VH )GL7@: 5T, H N.F6U P?6.7;;<M@: J 6Q b. 2, years to maturity$ 3F coupon rate$ current price is B''0. Appro#imate 5T, H E7 I ?E6777 J ;;G@K6N H E<6.;6:LKENNG.L H N.6MU ?E6777I;;G@K: .inancial calculator ?'H;7 1,TH7 .VH6777 1VH );;G@: 5T, H N.GGU c. %( years to maturity$ ..(F coupon rate$ current price is B23'3. Appro#imate 5T, H EFL I ?E6777 J 67;7@K:L H EF;.FKE676L H F.:NU ?E6777I67;7@K: .inancial calculator ?'HL7 1,TH<:.L .VH6777 1VH )67;7@: 5T, H F.;FU P?6.7<67MF@: J 6Q 2'. Cn hursday$ the following bond price ;uotation appears in the newspaper. Interpret each item that appears in the ;uote and compute its current yield. =ast =ast Est Est B Hol Company D icker@ Coupon Aaturity *rice Iield "pread +" D333<s@
!al-Aart "tores!A 7.((3 Aay 2$ %32' 00.%-3 7.,70 723 ,,$.'3
The ticker symbol ?W,T@Ostock tradin! ticker symbol for Wal),art stock. Coupon rate is <.LL7 percentA with a E6 777par value Wal),art pays interest of 7.7<LL7 # 6 777 H E<L.L7 per year or E::.ML every si# months. The bond matures and par value payment is due on ,ay 6 :76;. The closin! price of the bond is GG.:M7 percent of par or EGG:.M7A since the "uote appears in Thursday9s paper this is the closin! price on Wednesday. Current yield is found by dividin! the annual coupon interest by the current price. This e"uals E<L.L7KEGG:.M7 H <.LF percent. C%ast 5ieldD represents the bond9s yield to maturity <.N<G. $t differs from the current yield as it incorporates both the coupon interest and the difference in current priced par value. C*stimated SpreadD is the difference between the yield to maturity on the Wal),art bond and a similar maturity /.S. Treasury bond. The spread is <M basis points ?7.<MU@ from the yield to maturity on Treasury security that matures in 67 years as seen by the number under the C/STD column. Since the Wal),art bond has a yield to maturity of <.N<G percent the 67)year Treasury security must have a yield to maturity of about <.N<GU ) 7.<MU H <.6MG percent. 67);7
The CVolD column represents actual bond tradin! volume in thousands of dollars. The market value ?"uantity traded times last price@ of the tradin! volume is ENN F;7 777. With a last price of EGG:.M7 the appro#imate number of this type of Wal),art bond that traded is ENN F;7 777KEGG:.M7 H NM ;:6. 27. *erusing the corporate bond ;uotations$ you write down some summary information1 =ast =ast Est Est B Hol Company D icker@ Coupon Aaturity *rice Iield "pread +" D333<s@
!al-Aart "tores!A !al-Aart "tores!A =iberty Aedia = 9ord Aotor Credit 9 7.((3 7.2%( (.-33 -.%(3 23 years . years 23 years . years 00.%-3 00.((7 23%.-(3 23-.737.,70 7.%33 (.'27 ,.32% 7% 22% 2.' 23 23 23 23 ,,$.'3 (3$'%3 %,$37( %%$.,'
a. !hich company is the riskiest& !hy& Which company is riskiest is a matter of opinion or additional researchA the bond listin!s do not !ive information on a firm<s level of risk only on a bond issue9s risk. b. !hich bond has the highest default risk& !hy& The bond with the hi!hest default is the .ord ,otor bondA it was the hi!hest spread relative to a similar /.S. Treasury bond. c. !hy would !al-Aart have two bonds trading at different yields& 1art of the reason for the difference in yields could be the time to maturity as the bond with the shorter time to maturity has the lower yield. Another reason could be the two bond issues may have different covenants or bond ratin!s so credit risk differs. d. Compute the current yield for each of the four bonds. Wal),art 67 years E<L.L7KEGG:.M7 H <.LFU Wal),art F years E<6.:LKEGGL.L< H <.6<U %iberty ,edia 67 years ELM.77KE67:M.L7 H L.LLU .ord ,otor Credit F years EM:.L7KE67M<.7M H N.MLU e. Compute yield to maturity for each of the four bonds. Wal),art 67) year bond: <.N<U Wal),art F)year bond: <.:;U %iberty ,edia 67)year bond: L.;LU .ord ,otor Credit F)year bond: N.67U 2(. Iou run across the following bond ;uotation on a 9riday. Aaturity 8sked Jate AoKIr /id 8sked Chg. Ild -.(33 Lov %7 2'213, 2'213-0 (.37 a. !hat kind of security is it& This is the "uote we see in the newspapers for a Treasury securityA specifically a Treasury bond as it matures ?in 'ovember :7:<@ more than 67 years from now. $f it matured less than 67 years from now it would be a Treasury noteA less than 6 year from now it would be a Treasury bill. 67);6
b. Interpret the information that is contained in the ;uote. +ate: The coupon rate for the bond is M.L77 percent of par value meanin! that a E6777 par value bond will pay EMLof interest annually in two semiannual payments of E;M.L7. ,aturity: The bond matures in 'ovember :7:<. Bid: The bid price or the price received by investors sellin! bonds is 6;6 NK;: percent of par or E6 ;66.FML. Ask: The ask price or the price paid by investors purchasin! the bonds is 6;6 MK;: of par or E6 ;6: 6FML. The bid)ask spread represents dealer profit or E7.;6:L per E6777 par value bond. Spreads are often an indicator of how li"uid a security isA the narrower the bid)ask spread the !reater the li"uidity ?and usually the !reater the tradin! volume@. Ch!: The chan!e in price from the previous day was JGK;: of a percenta!e point. Asked yld: The yield to maturity based on the asked price is L.7< percent. c. "uppose a corporate bond with the same time to maturity has a credit-risk spread of %(3 basis points. !hat should be the yield to maturity for the corporate bond& A credit)risk spread of :L7 basis points or :.L7 percenta!e points means the corporate bond9s yield to maturity will be L.7<U I :.L7U H M.L<U 2,. a. 8 B2$333 face value bond issued by the Dysane Company currently pays total annual interest of B-0 per year and has a 2'-year life. !hat is the present value$ or worth$ of this bond if investors are currently willing to accept a 23 percent annual rate of return on bonds of similar ;uality if the bond is a Eurobond& As a *urobond coupon interest is paid on an annual basis: 1rice H EMG W 1V$.A?67U 6;@ I E6 777 W 1V$. ?67U 6;@ H EMG?M.67;@ I E6 777?.:G7@ H EFL6.6<Z
b. )ow would your answer in *art a change if the bond is a +.". bond& Coupon interest is paid semiannually so 6K: 1eriodic rate r H ?6.67@ J 6 H 7.7<FF or <.FFUA n H 6; W : H :N 1rice H E;G.L7 W 1V$.A?<.FFU :N@ I E6 777?<.FFU :N@ H E;G.L7?6<.LLL@ I E6 777?.:G7@ H EFN<.G: c. )ow would your answer in *art b change if$ one year from now$ investors only re;uired a ,.( percent annual rate of return on bond investments similar in ;uality to the Dysane bond& 6K: 1eriodic rate r H ?6.7NL@ J 6 H 7.7;:7 or ;.:7U n H 6: W : H :< 1rice H E;G.L7 W 1V$.A?;.:7U :<@ I E6 777 W 1V$.?;.:7U :<@ H E;G.L7?6N.LMN@ I E6 777?.<M7@ H E6 6:<.ML d. "uppose the original bond can be purchased for B0%(. !hat is the bond<s yield to maturity& Calculator solution: G:L press 1VA 6777 press .VA MG press 1,TA 6; press 'A Compute Ui Solution: F.G7U
67);:
2-. a. Iou own a two-bond portfolio. Each has a par value of B2333. /ond 8 matures in ( years$ has a coupon rate of . percent$ and has a annual yield to maturity of 0.%3 percent. /ond / matures in 2( years$ has a coupon rate of . percent and has an annual yield to maturity of 0.%3 percent. /oth bonds pay interest semiannually. !hat is the value of your portfolio& !hat happens to the value of your portfolio if each yield to maturity rises by one percentage point& .or Bond A: the periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.7G:A r H 7.7<L or <.LU. The semi)annual coupon is EF7K: H E<7A the number of periods is L years # : or 67 periods. 1rice H E<7 W 1V$.A?<.LU 67@ I E6 777 W 1V$.?<.LU 67@ H E<7?M.G6;@ I E6 777?7.N<;G;@ H EGN7.<L The *#cel command for computin! this is H1V?7.7<L 67 <7 6777@. .or Bond B: the periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.7G:A r H 7.7<L or <.LU. The semi)annual coupon is EF7K: H E<7A the number of periods is 6L years # : or ;7 periods. 1rice H E<7 W 1V$.A?<.LU ;7@ I E6 777 W 1V$.?<.LU ;7@ H E<7?6N.:FG@ I E6 777?7.:NM77@ H EG6F.LN The *#cel command for computin! this is H1V?7.7<L ;7 <7 6777@. The total value of the portfolio ?Bond A I Bond B@ EGN7.<L I EG6F.LNHE6 FMG.76. $f the yield to maturity on each bond rises by one percenta!e point the periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.767:A r H 7.7<GMN or <.GMNU. 'ew value of bond A: 1rice H E<7 W 1V$.A?<.GMNU 67@ I E6 777 W 1V$.?<.GMNU 67@ H E<7?M.M;6@ I E6 777?7.N6L;6@ H EG:<.LL 'ew value of bond B: 1rice H E<7 W 1V$.A?<.GMNU ;7@ I E6 777 W 1V$.?<.GMNU ;7@ H E<7?6L.<6<@ I E6 777?7.:;:GN@ H EF<G.L: 'ew portfolio value H EG:<.LL I EF<G.L: H E6 MM<.7M b. Jather than own a (-year bond and a 2(-year bond$ suppose you sell both of them and invest in two 23-year bonds. Each has a coupon rate of . percent paid semiannually and has a yield to maturity of 0.%3 percent. !hat is the value of your portfolio& !hat happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point& .or the 67)year bonds the periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.7G:A r H 7.7<L or <.LU. The semiannual coupon is EF7K: H E<7A the number of periods is 67 years # : or :7 periods. 1rice H E<7 W 1V$.A?<.LU :7@ I E6 777 W 1V$.?<.LU :7@ 67);;
H E<7?6;.77F@ I E6 777?7.<6<N<@ H EG;<.GN The *#cel command for computin! this is H1V?7.7<L :7 <7 6777@. Since both bonds are identical the value of the portfolio is :# EG;<.GN H E6 FNG.G:. $f the yield to maturity on each bond rises by one percenta!e point the periodic interest rate is the value of r such that ?6Ir@: J 6 H 7.767:A r H 7.7<GMN or <.GMNU. 'ew value of the bonds: 1rice H E<7 W 1V$.A?<.GMNU :7@ I E6 777 W 1V$.?<.GMNU :7@ H E<7?6:.<FF@ I E6 777?7.;MFN7@ H EFMF.6: Since both bonds are identical the value of the portfolio is :# EFMF.6: H E6 MLN.:<. c. /ased upon your answers to parts a@ and b@$ evaluate the price changes between the two portfolios. !ere the price changes the same& !hy or why not& *ffect of a 6)percent increase in the yield to maturity: .ive and 6L)year bond portfolio: The portfolio value fell from E6 FMG.76 to E6 MM<.7M a total of E67<.G< or L.LF percent. Two ten)year bond portfolio: The portfolio value fell from E6 FNG.G: to E6 MLN.:< a total of E66;.NF or N.7F percent. Althou!h the avera!e portfolio bond time)to)maturity was 67 years in both portfolios the chan!es in portfolio values were not the same. This is because present values wei!ht earlier cash flows more heavily than later cash flows. This is easily seen by comparin! the present value of the E6 777 par value when the yield to maturity is G.: percent: Time to maturity L years 67 years 6L years 1resent value of E6 777 EN<;.G; E<6<.N< E:NM.77 The avera!e of the L) and 67)year present values is ?EN<;.G; I E:NM.77@K: H E<LL.<MA this is !reater than the 67)year present value of E<6<.N<. 2.. 8 bond with a par value of B2333 has a coupon rate of - percent and matures in 2( years. +sing a spreadsheet program$ graph its price versus different yields to maturity$ ranging from 2 percent to %3 percent. Is the relationship between price and yield linear& !hy& "emi-annual coupons M B'(? number of periods M 2( x % M '3 A spreadsheet can be used to find the value of a bond with yields to maturity in different cells ran!in! from 6 percent to :7 percent. The Chart Wi>ard in *#cel can be used to plot the bond prices and yields. The relationship between price and yield to maturity is not linear as the present value e"uations re"uire the use of e#ponents. he present value decreases more sharply the higher the yield we use for discounting.
67);<
Bond Price versus Yield to Maturity $2,000.00 $1,800.00 $1,600.00 $1,400.00 Bond Price ($) $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 $0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Yield to Maturity (%)
20. >lobal Cycles D>C@ offers investors a DJI* program. 8n investor purchases 233 shares of >C at a price of B%3 per share on #anuary %. )ow many shares will the investor own on December '2 if the following dividends are paid and the investor participates in the DJI* program Dassume the firm allows fractional shares and accounts for them up to three decimal places@& If the stock<s price is B%-.(3 on December '2 what is the value of her investment in >C& Aarch 21 dividend paid of B3.(3 per share? stock price is B%2 #une 21 dividend paid of B3.(3 per share? stock price is B%%.( "eptember 21 dividend paid of B3.(( per share? stock price is B20 December 21 dividend paid of B3.(( per share? stock price is B%( ,arch 6: total dividends received are E7.L7Kshare # 677 shares H EL7. The investor is able to purchase shares e"ual to EL7KE:6 H :.;F6 shares. The total number of shares owned is now 677 I :.;F6 H 67:.;F6. Tune 6: total dividends received are E7.L7Kshare # 67:.;F6 shares H EL6.6G. The investor is able to purchase shares e"ual to EL6.6GKE::.L H :.:ML shares. The total number of shares owned is now 67:.;F6I :.:ML H 67<.NLN. September 6: total dividends received are E7.LLKshare # 67<.NLN shares H ELM.LN. The investor is able to purchase shares e"ual to ELM.LNKE6G H ;.7;7 shares. The total number of shares owned is now 67<.NLN I ;.7;7 H 67M.NFN. 0ecember 6: total dividends received are E7.LLKshare # 67M.NFN shares H ELG.:;. The investor is able to purchase shares e"ual to ELG.:;KE:L H :.;NG shares. The total number of shares owned is now 67M.NFN I :.;NG H 667.7LL. 67);L
&n 0ecember ;6: value of the stock holdin! H E:M.L7 # 667.7LL H E; 7:N.L6. %3. If a stock<s earnings per share is B%.33 what will be the dividend per share if the payout ratio is 73F& If the following year<s earnings per share is B%.23 what will the payout ratio be if the firm wants to maintain dividend growth of . percent& 0ividend H earnin!s per shares # payout ratio H E:.77 # 7.<7 H E7.F7. At FU dividend !rowth the ne#t year9s dividend will be E7.F7 # 6.7F H E7.FN ?rounded to the nearest penny@. $f dividends per share H E7.FN and earnin!s per share is E:.67 the dividend payout ratio is: E7.FN K E:.67 H 7.<6 or <6U %2. Iou purchased %33 shares of )%C Corporation stock at a price of B%3. Consider each of the following announcements separately. !hat will the price of the stock be after each change& )ow many shares will you own& !hat will be the total value of your holdings Dvalue of stock plus any income@& a. he firm announces a 23 percent stock dividend. 5our current wealth in the stock of the company is :77 shares # E:7 H E< 777. After the 67U stock dividend the number of shares you own rises 67U to ::7 shares but the market price of the stock will fall by 67U to about E6F.6F so your wealth in the stock will remain at E< 777. $n the case of stock dividends no new wealth is created so value of holdin!s before the stock dividend will e"ual the value of the holdin!s after the stock dividend. he firm announces a %-for-2 stock split 5our current wealth in the stock of the company is :77 shares # E:7 H E< 777. After the :)for)6 stock split the number of shares you own rises <77 shares but the market price of the stock will fall by half to E67 so your wealth in the stock will remain at E< 777. $n the case of stock splits no new wealth is created so value of holdin!s before the stock split will e"ual the value of the holdin!s after the stock split.
b.
c. he firm announces a B3.(3 per share dividend Din your answer use the price of the stock on the ex-dividend date@. 5our current wealth in the stock of the company is :77 shares # E:7 H E< 777. 5ou will receive income ?dividends@ of E7.L7 # :77 shares H E677. The value of the stock will fall by E7.L7 on the e#)dividend date from E:7 to E6G.L7 per share. This occurs as the firm has distributed assets totalin! E7.L7Kshare to its shareholders. After the dividend the number of shares you own remains at :77 shares but the market price of the stock will be E6G.L7 so the value of your stock investment is :77 shares # E6G.L7Kshare H E; G77. Addin! the E677 dividends received to this amount the value of your holdin!s ?stock plus dividends@ is E< 777. 67);N
$n the case of dividends no new wealth is created it is only transferred. The value of holdin!s ?stock I cash@ before the dividend will e"ual the value of the holdin!s after the dividend ?i!norin! ta#es@. d. he firm announces it will repurchase 23 percent of its shares? you do not offer to sell any of your shares. 5our current wealth in the stock of the company is :77 shares # E:7 H E< 777. A 67U reduction in the number of shares outstandin! will all else e"ual increase the stock9s price by about 67U to appro#imately E::Kshare. As kept your holdin!s their value is appro#imately :77 shares # E::Kshare H E< <77 an increase in value of 67U. %%. he 9ridge-8ir Company<s preferred stock pays a dividend of B7.(3 per share annually. If the re;uired rate of return on comparable ;uality preferred stocks is 27 percent$ calculate the value of 9ridge-8ir<s preferred stock. 1rice H 0p Kr H E<.L7K.6< H E;:.6< he #oseph Company has a stock issue that pays a fixed dividend of B'.33 per share annually. Investors believe the nominal risk-free rate is 7 percent and that this stock should have a risk premium of , percent. !hat should be the value of this stock& +e!ardin! of whether students consider this to be preferred or common stock the fact that the dividend !rowth rate is >ero results in the same answer. The re"uired return is the risk)free rate plus the risk premium: <U I NU H 67U so the value of the stock will be E; K 7.67 H E;7.77. %7. he =o Company earned B%.,3 per share and paid a dividend of B2.'3 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of ( percent per year in the future. Determine the value of the stock1 a. if the re;uired rate of return is 2% percent. 1 H 06K?r J !@ H E6.;7?6.7L@K?.6: J .7L@ H E6G.L7 b. if the re;uired rate of return is 2( percent. 1 H E6.;7?6.7L@K?.6L J .7L@ H E6;.NL c. given your answers to *arts a and b$ how are stock prices affected by changes in investor<s re;uired rates of return& 3i!her re"uired rates of return lead to lower prices. %(. he 9rench haler and Company<s stock has paid dividends of B2.,3 over the past 2% months. Its historical growth rate of dividends has been . percent but analysts expect the growth to slow to ( percent annually for the foreseeable future. a. Determine the value of the stock if the re;uired rate of return on stocks of similar risk is 2( percent. The !rowth rate of importance in this problem is the future e#pected !rowth rate of L percent rather than the historical !rowth rate. /sin! the constant dividend !rowth model 67);M
%'.
the value of the stock should be: 07 ?6 I !@ K ?r J !@ H E6.N7 ?6.7L@ K ?7.6L J 7.7L@ H E6.NF K 7.67 H E6N.F7. b. If analysts believe the risk premium on the stock should be reduced by % percentage points$ what is the new re;uired rate of return on 9rench haler and Company stock& /ut how much should its price change from the answer you computed in part a& A reduction in the risk premium of : percenta!e points means the re"uired rate of return on the stock should now be 6LU minus :U or 6;U. $ts stock price should be: 07 ?6 I !@ K ?r J !@ H E6.N7 ?6.7L@ K ?7.6; J 7.7L@ H E6.NF K 7.7F H E:6.77. Which is a price increase of E<.:7 or E<.:7KE6N.F7 H :LU :N. ,ercier Corporation9s stock is sellin! for EGL. $t has Bust paid a dividend of EL a share. The e#pected !rowth rate in dividends is F percent. a. !hat is the re;uired rate of return on this stock& r H ?06K1@ I ! H EL?6.7F@KEGL I .7F H .6;M or 6;.MU b. +sing your answer to *art a suppose Aercier announces developments which should lead to dividend increases of 23-percent annually. !hat will be the new value of Aercier stock& 1 H 06K?r J !@ H EL?6.67@ K?.6;M J .67@ H E6<F.NL c. 8gain using your answer to *art a$ suppose developments occur that leave investors expecting that dividends will not change from their current levels into the foreseeable future. Low what will be the value of Aercier stock& 1 H 06K?r J !@A ! H 7 1 H ELK.6;M H E;N.L7 d. 9rom your answers to *arts b and c$ how important are investors< expectations of future dividend growth to the current stock price& (rowth e#pectations are very important in determinin! stock price. 3i!her !rowth e#pectations lead to hi!her stock prices. %-. he common stock of JA! Inc. is selling at B.. a share. It just paid a dividend of B7. Investors expect a return of 2( percent on their investment in JA! Inc. 9rom this information$ what is the expected growth rate of future dividends& 1 H 06K?r J !@ H FF H <?6 I !@K?.6L J !@ 6;.: J FF! H < I <! G.: H G:! .67 H ! (rowth rate is 67U.
%.. =erman Company has preferred stock outstanding. It pays an annual dividend of B23. If its current price is B-3$ what is the discount rate investors are using to value the stock& 1 H 0p Kr H EM7 H E67Kr r H .6<; or 6<.;U
67);F
%0. Interpret the following stock price ;uote. In addition$ what is "i66ler<s approximate earnings per share& !hat was the stock<s closing price the previous day& I D (% weeks Ild Hol Let F C)> )i =o "tock "ym Div F *E 233s =ast Chg E2-.' -.2' (.33 "i66lr "N .2, %.%( .77 , O3.%( 5T0 U chan!e: Since Tanuary 6 the stock has risen in value by 6M.;U. L: week 3iK%o: &ver the past year ?L: weeks@ Si>>ler9s stock price has ran!ed from EL to EM.6;. 0iv: $n the past 6: months E.6N per share in dividends has been paid. 5ld U ?dividend yield is dividendKclosin! price@: .6NKN H .7:NN or :.MU. 1*: ?ratio of price to earnin!s per share@. Appro#imate eps: 1K* H :L H NKeps H :L eps H E7.:<. Vol 677s ?tradin! volume in hundreds@: F< <77 shares were traded. %ast: 0ay9s closin! price or last trade price was EN.77. 'et chan!e: ?chan!e in closin! price from the previous tradin! day@. The previous day9s close was EN.:L per share as the day9s close of EN was E7.:L less than the prior day. ;7. Jitter Incorporated just paid a dividend of B% per share. Its management team has just announced a technological breakthrough that is expected to result in a temporary increase in sales$ profits$ and common stock dividends. 8nalysts expect the firm<s per-share dividends to be B%.(3 next year$ B' in two years$ and B'.(3 in three years. 8fter that$ normal dividend growth of ( percent is expected to resume. If shareholders expect a 2(percent return on their investment in Jitter$ what should the firm<s stock price be& .ind present value of dividends in 5ears 6 : and ;: : ; 1V6J; H E:.L7K6.6L I E;K?6.6L@ I E;.L7K?6.6L@ H N.M< Value of stock in 5ear ;: 1; H 0<K?r J !@ H E;.L7?6.7L@K?.6L J .7L@ H E;N.ML 1resent Value of 5ear ; price H E;N.MLK?6.6L@ H E:<.6N 1rice H present value of future e#pected dividends H EN.M< I E:<.6N H E;7.G7 '2. ough times have hit the retail store chain of /rador$ Inc. 8nalysts expect its dividend of B2.33 a share to fall by (3 percent next year and another (3 percent the following year before it returns to its normal growth pattern of ' percent a year. If investors expect a return of 2. percent on their investments in /rador stock$ what should its current stock price be& .ind present value of dividends in 5ears 6 and :: : 1V6J: H E7.L7K6.6F I E7.:LK?6.6F@ H E7.N7 Value of stock in 5ear :: 1: H 0;K?r J !@ H E7.:L?6.7;@K?.6FJ.7;@ H E6.M: 1resent value of 5ear : H stock price H E6.M:K?6.6F@ H E6.:< 1rice H present value of future e#pected dividends H E7.N7 I E6.:< H E6.F< '%. #! Corp has a dividend of B3.(3. he dividend is expected to grow at a ,F rate over time. /ased on the stock<s risk$ investors re;uire an 22-percent rate of return. 67);G
: ;
a. +sing the constant dividend growth model$ what should the stock<s price be& Value of stock: 17 H 06K?r J !@ H E7.L7?6.7N@K?.66 J .7N@ H E67.N7 b. Estimate the firm<s dividends for the next 23 years and find their present value. !hat proportion of the stock<s price is based upon dividends which are expected to occur more than 23 years into the future& 5ear 0ividend 1V ?dividend@ 5ear 0ividend 1V ?dividend@ 6 7.L;77 7.<MML N 7.M7G; 7.;MG: : 7.LN6F 7.<LN7 M 7.ML6F 7.;N:6 ; 7.LGLL 7.<;L< F 7.MGNG 7.;<LF < 7.N;6: 7.<6LF G 7.F<<M 7.;;7: L 7.NNG6 7.;GM6 67 7.FGL< 7.;6L<
Sum of dividends in year 6 J 67 H E;.G6A proportion of stock price based on dividends after year 67: 6 J ?E;.G6KE67.N7@ H 7.N;6 or N;.6 percent c. !hat proportion of the firm<s price is based upon dividends which are expected to occur more than five years into the future& Sum of dividends in year 6 J L H E:.6F 1roportion of stock price based on dividends after year 67: 6 J ?E:.6FKE67.N7@ H 7.MG< or MG.< percent ''. 8 firm<s dividends are expected to grow %3 percent a year for the next five years and then trend downward by ' percent a year until they stabili6e at a constant growth rate of ( percent. he current dividend is B3..3 a share and the stock<s re;uired rate of return is 2' percent. !hat should its current price be& If these growth expectations come to pass$ what will its price be four years from now& Eight years from now& Calculations for the current stock price follow ?based on a spreadsheet 1V calculations could be rounded to the nearest penny or tenth of a penny@. 5ear (rowth rate 0ividend 1V?dividend@ 5ear (rowth rate 0ividend 1V?dividend@ 6 :7 7.GN 7.F<GLLML N 6M :.;:G 6.66FNG<; : :7 6.6L: 7.G7:6FL M 6< :.NLL 6.6:FLG<: ; :7 6.;F: 7.GLF7M:L F 66 :.G<M 6.67FN6G6 < :7 6.NLG 6.76M<::: G F ;.6F; 6.7LGLNL: 1rice yr 67 H 1V price 67H L :7 6.GG6 6.7F7<<F; 67 L ;.;<: 7.GF<LL6M <;.FNL<6F 6:.G:::<6
67)<7
1rice yr 7H
01&$0223$
The current price is the sum of the present values of the estimated dividends in years 6)67 plus the present value of the price in year 67A it e"uals E:;.6;. The year 67 price is E;.;<:Y?6.7L@K?.6;).7L@ or E<;.FN. The present value of the stock price in year 67 is E<;.FNK?6.6;@67 H 6:.G:. Addin! this present value of the sum of the year 6)67 present values !ives a current price of E:;.6;. The spreadsheet can be adopted to estimate year < and year F prices. To estimate the price in year < we start with the year L dividend and discount it back one year to year <. Continuin! this process and findin! the present value of the year)67 price !ives us 5ear (rowth rate 0ividend 1V?dividends@ as of year <: 5ear (rowth rate 0ividend 1V?dividends@ as of year <: 6 :7 7.GN : :7 6.6L: ; :7 6.;F: < :7 6.NLG L :7 6.GG6 6.MN6N<:L N 6M :.;:G 6.F:<776L M 6< :.NLL 6.F<76<;6 F 66 :.G<M 6.F7MLM<: G F ;.6F; 1rice yr 67 6.M:MLG; 67 L ;.;<: <;.FNL<6F 6.N7L:FLN :6.7NG;M; $&4134$1
1V year 67 price as of year < 1rice yr <
Similarly the spreadsheet can be adapted to find the stock9s year)F price which e"uals the present value ?as of year F@ of the year)G dividend the year)67 dividend and the stock9s price in year 67: E:.F: I E:.N: I E;<.;L H E;G.MG. SUGGESTE" /UI5 6. :. Why is the volume of debt issues consistently lar!er than the volume of e"uity issues2 0efine or discuss briefly: a. $ndenture b. 0ebenture c. ,ort!a!e bonds d. 1utable bonds e. 5ankee bonds .ind the price of a bond that matures in 6: years has a E6 777 par value pays coupons semiannually with a coupon rate of G percent. The yield to maturity on the bond is 66 percent. 67)<6
;.
"olution The annual coupon is GU W E6 777 H EG7A it is paid as E<L every si# months. The number of periods is 6: years W : H :<. The periodic rate is ?6.66@ 6K: J 6 or 7.7L;N or L.;N percent. /sin! a financial calculator the price is EFFL.;F. <. Shareholders of /&$ Corp. have a re"uired return of 6< percent and e#pect /&$9s dividend to !row at L percent annually. This year9s dividend was E:.77. a. What is the price of the stock today2 b. 3oldin! all else constant suppose /&$ mana!ement announces a dividend free>eA dividends will be held constant into the foreseeable future. What will be the new price of /&$ stock2 "olution a. /sin! the constant dividend !rowth model today9s price is 17 H 06K?r J !@ H E:.77 ?6.7L@K ?.6< J .7L@ H E:;.;;. b. The stock should now be priced as a perpetuity or usin! the constant !rowth model with ! e"ual to >ero: 17 H 07 Kr H E:.77K.6< H E6<.:G
67)<:
Learning xtension 10a !nnuali"ing #ates of #eturn

The dollar return on a sin!le financial asset held for a specific time or holdin! period is !iven by 0ollar return H $ncome received I price chan!e The percenta!e return is simply the dollar return divided by the initial price of the stock: dollar return initial price 1ercenta!e returns should be annuali>ed to put investments with varyin! holdin! periods on an e"uivalent basis.
1ercenta!e +eturn H
PROBLEM AN" ANSWER 2. >iven the information in the text$ compute annuali6ed returns. 8sset Income *rice Change Initial *rice ime *eriod 8 B % B , B %0 2( months / 3 23 73 22 months C (3 -3 '3 - years D ' O. %3 %7 months a. Total return H E: I EN H EF 1ercenta!e return H EFK:G H 7.:MN Annuali>ed return H ?6.:MN@6:K6L J 6 H 7.:6L or :6.LU b. Total return H E7 I E67 H E67 1ercenta!e return H E67K<7 H 7.:L 6:K66 Annuali>ed return H ?6.:L@ J 6 H 7.:MN or :M.NU c. Total return H EL7 I EM7 H E6:7 1ercenta!e return H 6:7K;7 H <.7 Annuali>ed return H ?6 I <@6KM J 6 H 7.:LF or :L.FU d. Total return H E; I E JF H E JL 1ercenta!e return H JLK:7 H J.:L 6K: Annuali>ed return H ?6 I J.:L@ J 6 H J7.6;< or J6;.<U %. >iven the information below$ compute annuali6ed returns 8sset 8 / C D *urchase *rice B %3 2( 2(3 '.(3 Current *rice B %, 2. 2'3 '.33 Income Jeceived B% 3.73 3 3.%3 ime *eriod -( weeks ' months % years . months
a. Total return H ?E:N J :7@ I E: H EF 1ercenta!e return in decimal form H EFK:7 H 7.<7 Annuali>ed return H ?6.<7@6K?MLKL:@ J 6 H 7.:N; or :N.;U 67)<;
b. Total return H ?E6F J 6L@ I E7.<7 H E;.<7 1ercenta!e return in decimal formH E;.<7K6L H 7.::M 6K7.:L Annuali>ed return H ?6.::M@ J 6 H 6.:NM or 6:N.MU c. Total return H ?E6;7 J 6L7@ I E7 H E):7 1ercenta!e return in decimal formH ):7K6L7 H )7.6;; Annuali>ed return H ?6 ) 7.6;;@6K: J 6 H )7.7NG or )N.GU d. Total return H ?E;.77 J ;.L7@ I E7.:7 H E)7.;7 1ercenta!e return in decimal formH EJ7.;7K;.L7 H J7.7FN Annuali>ed return H ?6 I J.7FN@6K?FK6:@ J 6 H J7.6:N or J6:.NU
67)<<

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Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter 10 Bonds and Stocks: Characteristics and Valuations

Learning Extension: Calculate rates of return.

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

supernormal !rowth stock.

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

$nflation 1ar value E6 7<7.7 <U 7 E6 7G:.7 LU 7 E6 6LM.L NU :

Annual coupon $nterest E;6.:7 E;:.MN E;<.M;

5ear 6 : ; < L T&TA% +*C*$1TS

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

e"uals )1V?BG B67 B66 BN 7@

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Compute coupon cash flow: Bond price

E7.77 e"uals ?B; YBN@KBL E;GG.6: e"uals )1V?BG B67 B66 BN 7@

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Compute coupon cash flow: Bond price 1ercenta!e chan!e:

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

1V year 67 price as of year < 1rice yr <

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

Learning xtension 10a !nnuali"ing #ates of #eturn

Chapter Ten: Bonds and Stocks: Characteristics and Valuations

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5ear 6 : ; < L T&TA% +C$1TS