金融学概论讲义(北大光华管理学院)lecture02.doc

Principles of FinanceLecture 02Bond and Share ValuationObjectivesTo apply the ideas of discounting and present value: Bond features and prices Bond yields Share valuation using dividend discounting models Return, yield, growth, and price/earnings ratiosValuing Multiperiod Cash Flows and Valuing Multiperiod Cash Flows0123+6,540.581112.013,419.442,009.131,4604,1002,200Valuing Multiperiod Cash FlowsValuing Multiperiod Cash Flows If you invest $15,000 for 10 years, you receive $30,000. What is your annual rate of return?Valuing Multiperiod Cash FlowsPerpetuity A stream of cash flows that lasts forever Valuing a level perpetuity Perpetuity Valuing a growing perpetuity Annuity A stream of cash flows that lasts for a fixed number of years Valuing an (ordinary) annuityt+1t210 AnnuityPerpetuity Starting at t+1PerpetuityStarting at 1Assumptions of Ordinary Annuity 1. The first cash flow occurs exactly one period from now2. All subsequent cash flows are separated by exactly one period3. All periods are of equal length4. All cash flows have the same nominal value5. The term structure of interest rate is flatPresent Value of AnnuityPV of AnnuityPV of Perpetuity Starting at time 1-Perpetuity Starting at time t+1Present Value of Annuity Present Value of Annuity Example of AnnuityChoice 1: Lease a car for 4 years at 300 per monthChoice 2: Buy the car at 18,000 and you can sell it at the end of 4 years at 6,000If the cost of capital is 0.5% per month with monthly compounding, which one is the better deal?Answer: Pure Discount Bonds A pure discount (zero-coupon) bond is a security that promises to pay a specified single cash payment (face value or par value) at its maturity date We can always disaggregate any fixed income security into sum of pure discount bonds Example of pure discount bond: A one-year pure discount bond with par value of 1,000 is trading at 950, at its maturity the investor receives 1,000Coupon Bonds A coupon bond obligates the issuer to make periodic payments of interest (called coupon payments) to the bondholder until the bond matures at which time the face value (par value) is also repaid to the bondholder Coupon rate is the interest rate applied to the face value in order to compute coupon payment Current yield is the coupon payment divided by bond price A coupon bond can be viewed as a portfolio of pure discount bondsCoupon Bonds Example of a coupon bond- A 30-year bond with par value of 1,000, the coupon rate is 8% with semi-annual payment - 40 coupon payment every six-monthPar, Premium and Discount Bonds A coupon bond with its current price to its par value is a par bond If it is trading below par it is a discount bond If it is trading above par it is a premium bond Pure discount bonds are always purchased at a discount from their face value or par valueBond Markets Treasury bonds: The government issues bonds to fund national expenditure. Treasury bonds vary in maturity, some up to 30 years Corporate bonds: Companies borrow money by issuing bonds Convertible bonds: gives the bondholder the option to convert each bond for a specified number of shares Callable bonds: gives the issuer the option to redeem the bond before maturityValuing Bonds The fair price of a bond is given by the discounted present value of its coupon payments and payment of par value, using the market-determined discount rate: Where p: the fair price c: annual coupon rate F: par value (face value) r: spot discount rate T: the term to maturity (we are assuming coupons are paid annually!)Example of Bond Pricing Treasury bond 8%, redeemable in 3 years (assuming annual coupon payments) Term structure of interest rate is flat at 6% per annum 105.35Example of Bond PricingA bond matures in 3 years, with annual coupon payment of $100 and face value of $1000. You want to estimate its market value, but you find it difficult to estimate the appropriate interest rates. However, you have noticed that 3 pure discount bonds, each with $1000 par value, are traded at $960, $890, and $810 respectively.Since coupon bonds are portfolios of pure discount bonds, we can estimate its price using the market price of pure discount bonds.Example of Bond PricingExample of Bond PricingAlternatively, we can estimate the interest rate using the price of pure discount bond.Interest Rates and Bond Prices Bond prices fall when interest rates rise Bond prices 。