hemendra ppt

8/2/2019 Hemendra Ppt

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By-

Hemendra Shaktawat

MBA III


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In general, the value of an asset is the pricethat a willing and able buyer pays to a willing

and able seller.

Note that if either the buyer or seller is notboth willing and able, then an offer does notestablish the value of the asset.


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There are several types of value, of which weare concerned with three:

Book Value - The assets historical cost less itsaccumulated depreciation.

Market Value - The price of an asset as determined ina competitive marketplace.

Intrinsic Value - The present value of the expectedfuture cash flows discounted at the decision makersrequired rate of return.


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There are two primary determinants of theintrinsic value of an asset to an individual:

The size and timing of the expected future cashflows.

The individuals required rate of return (this isdetermined by a number of other factors such asrisk/return preferences, returns on competinginvestments, expected inflation, etc.)


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A bond is a tradeable instrument thatrepresents a debt owed to the owner by theissuer. Most commonly, bonds pay interestperiodically (usually semiannually) and then

return the principal at maturity.

Most corporate, and some government, bondsare callable. That means that at the

companys option, it may force thebondholders to sell them back to the company.Ordinarily, there are restrictions on the timingof the call and the amount that must be paid.


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There are two types of cash flows that areprovided by a bond investments:

Periodic interest payments (usually every six months, but

any frequency is possible).

Repayment of the face value (also called the principalamount) at maturity.

The following timeline illustrates a typical bondscash flows:

0 1 2 3 4 5

100 100 100 100 100

1,000


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We can use the principle of time value of moneyto find the value of this stream of cash flows.

Note that the interest payments are an annuity,

and that the face value is a lump sum.

Therefore, the value of the bond is simply thepresent value of the annuity-type cash flow and

the lump sum:

V= C(PVIFA)r,n + MV(PVIF)r,n


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Coupon Rate - This is the stated rate of intereston the bond. It is fixed for the life of the bond.Also, this rate determines the annual interestpayment amount.

Face Value - This is the principal amount(nominally, the amount that was borrowed). Thisis the amount that will be repaid at maturity.

Maturity Date - This is the date after which thebond no longer exists. It is also the date onwhich the loan is repaid and the last interestpayment is made.


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Assume that you are interested in purchasing abond with 5 years to maturity and a 10% couponrate. If your required return is 12%, what is thehighest price that you would be willing to pay?

0 1 2 3 4 5

100 100 100 100 100

1,000


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5 year time period

10% coupon rate.

Maturity value- 1000

Rate of return-12%

Coupon rate= 1000*10/100= 100

Formula

V= C(PVIFA)r,n+ MV(PVIF)r,n

V= 100(PVIFA)12,5 + 1000(PVIF)12,5

V= 100(3.605) + 1000(0.567)

V= 360.5 + 567V= 927.5

{ PVIF= 0.567, PVIFA= 3.605

This value referred from table .}


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The value of a bond depends on several factorssuch as time to maturity, coupon rate, and

required return.

We can note several facts about the relationship

between bond prices and these variables.

Higher required returns lead to lower bond

prices, and vice-versa.

Higher coupon rates lead to higher bondprices, and vice versa.

Longer terms to maturity lead to lower bond

prices, and vice-versa.


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hemendra ppt

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