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topic 6 bond valuation calculation summary notes together with activities
calculation for bond valuation, zero coupon and coupon bonds. valuing...
Course
econometrics (ecn702)
27 Documents
Students shared 27 documents in this course
University
Fiji National University
Academic year: 2021/2022
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Topic 6 Bonds ZERO COUPON BONDS
COUPON BONDS
Or
n
b b
n
b
b
r
F
r
r
V C
( 1 )
1 ( 1 )
VALUING ORDINARY SHARES
- Where : Ve = intrinsic value of the ordinary share D = dividend payment re = ordinary shareholder’s required return Pn = market value of share at the nth period VALUING PREFERENCE SHARES
Activities 1. What will be the intrinsic value of a $80,000 face value zero coupon bond that pays the required rate of return of 6 percent per annum with semi-annual payments, after 3 years.
F= 80,000 rb= 0/2 = 0 n= 3x2= 6 80000/(1+0)^
D= 0/0.
ZERO-GROWTH MODEL
- Assume no growth in dividends.
- Fixed dollar amount of dividends reduces the security to a perpetuity.
- Similar to valuing preference shares as the dividend remains unchanged.
. CONSTANT GROWTH MODEL
- Dividends expected to grow at a constant rate, g , over time. Where D 1 is the expected dividend at end of the first period i. D 1 =D 0 (1 + g ). Po= D1/k – g
EXAMPLE: Fly High Company is currently paying a dividend of $0 per share. Investors expect this dividend to grow at a constant rate of 5% pa perpetually. If the required rate of return is 12% pa, what price would you pay for this share?
D 1 =D 0 (1 + g ). D1= 0 (1+0) D1= 0. Po= D1/k – g 0.525/0-0. $7.
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topic 6 bond valuation calculation summary notes together with activities
Course: econometrics (ecn702)
27 Documents
Students shared 27 documents in this course
University: Fiji National University
Was this document helpful?
Topic 6
Bonds
ZERO COUPON BONDS
COUPON BONDS
Or
n
b
b
n
b
b
r
F
r
r
CV
)1(
)1(1
VALUING ORDINARY SHARES
