1

2
Face Value
Interest Ratefixed or floating
Maturity
Redemption value
Market Value
Features of a Bond
3
Bond value = Present value of interest +
Present value of maturity value:
0
1
INT
(1 ) (1 )
n
t n
t n
t
d d
B
B
k k

Bond with Maturity

4
Yield to Maturity
The yield-to-maturity (YTM) is the
measure of a bonds rate of return that
considers both the interest income and
any capital gain or loss. YTM is bonds
internal rate of return.
A perpetual bonds yield-to-maturity:
0
1
INT INT
(1 )
n
t
t
d d
B
k k

5
A bond (debenture) may be amortised
every year, i.e., repayment of principal
every year rather at maturity.
The formula for determining the value of a
bond or debenture that is amortised every
year, can be written as follows:

0
1
(1 )
n
t
t
t
d
CF
B
k

Bond Value and Amortisation

of Principal
6
Pure Discount Bonds
Pure discount bond do not carry an explicit
rate of interest. It provides for the payment of a
lump sum amount at a future date in exchange
for the current price of the bond

Value of a pure discount bond = PV of the amount on
maturity:


0
1
n
n
d
M
B
k

7
The bonds price sensitivity can be more
accurately estimated by its duration.
A bonds duration is measured as the weighted
average of times to each cash flow (interest
payment or repayment of principal).

(1+y/y) [{(1+y) + T (c-y)}]/ [c {(1+y)
T
- 1}+ y]

Bond Duration and Interest
Rate Sensitivity
8
Volatility
The volatility or the interest rate sensitivity
of a bond is given by its duration and
YTM. A bonds volatility, referred to as its
modified duration, is given as follows:


Duration
Volatility of a bond
(1 YTM)

9
A company may issue two types of shares:
ordinary shares and
preference shares
Features of Preference and Ordinary
Shares
Claims
Dividend
Redemption
Conversion
Valuation of Shares
10
The value of the preference share
would be the sum of the present values
of dividends and the redemption value.
A formula similar to the valuation of
bond can be used to value preference
shares with a maturity period:
1
0
1
PDIV
(1 ) (1 )
n
n
t n
t
p p
P
P
k k

Valuation of Preference
Shares
11
Valuation of Ordinary Shares
Single Period Valuation:
If the share price is expected to grow at g per
cent, then P
1
:
We obtain a simple formula for the share
valuation as follows:

1
0
DIV
e
P
k g

12
Multi-period Valuation
If the final period is n, we can write the
general formula for share value as
follows:


0
1
DIV
(1 ) (1 )
n
t n
t n
t
e e
P
P
k k

13
Growth in Dividends





Normal Growth


1
0
DIV
e
P
k g

Growth = Retention ratio Return on equity

ROE g b


Multi-period Valuation
14
Share value PV of dividends during finite super-normal growth period
PV of dividends during indefinite normal growth period

Multi-period Valuation
In the case of super normal growth for a
particular period and normal growth for the
remaining period

15
H - MODEL
In this there is super normal in the beginning
which linearly declines to a stable rate in a
particular time say 2H years.

The value of the shares is as follows

.
16
Price-Earnings (P/E) Ratio
P/E ratio is calculated as the price of a
share divided by earning per share

Using PE ratio the price of the share can
be calculated as follows

Price = PE ratio * EPS.