Outline of Session Outline of Session 4
Outline of Session Outline of Session 4 Outline of Session Outline of Session 4
A Few Words on Valuation There are three basic valuation methods, namely, Discounted Cash Flow (DCF) Method Relative Valuation Method Contingent−Claim Method Values of securities rarely stay constant. Valuation is not a one−time job. Re−valuation is always needed. We usually don’t observe the discount rates. We observe prices instead and infer discount rates from changes in prices. The return is the discount rate. In a well−functioning financial market, we can estimate a discount rate for each type of security of varying degree of risk. Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 2 of 19
Bonds Bonds are one type of fixed income security. Various types of bonds Government bonds Corporate bonds Pure discount (or Zero−coupon) bonds Console A typical bond has the following information on it. Maturity date Coupon rate (can be fixed or floating rate) Frequency of interest payments per year Face value Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 3 of 19
- Page 1: Outline of Session 4 Three Basic Va
- Page 5 and 6: Calculation of Bond Price Example:
- Page 7 and 8: These curves are convex. Last Updat
- Page 9 and 10: Interest Rate Risk (or Price Risk)
- Page 11 and 12: Stocks and the Stock Market Stocks
- Page 13 and 14: P P 0 1 = = Div 1 ( 1 + r ) ( 1 + r
- Page 15 and 16: Where Does g Come From? Year 1 2 3
- Page 17 and 18: Preferred stock is classified as e
- Page 19: In−class Exercises Let’s do som
Bonds<br />
Bonds are one type <strong>of</strong> fixed income security.<br />
Various types <strong>of</strong> bonds<br />
Government bonds<br />
Corporate bonds<br />
Pure discount (or Zero−coupon) bonds<br />
Console<br />
A typical bond has the following information<br />
on it.<br />
Maturity date<br />
Coupon rate (can be fixed or floating rate)<br />
Frequency <strong>of</strong> interest payments per year<br />
Face value<br />
Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. <strong>Session</strong> 4 | Slide 3 <strong>of</strong> 19
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