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AFX9504 Q in Lecture Week 6 - Bonds & Stocks - MS
AFX9504 Q in Lecture Week 6 - Bonds & Stocks - MS
AFX9504 Q in Lecture Week 6 - Bonds & Stocks - MS
15%
Step 1
Step 2
Step 3
Step 4
D0=$3
k=8%
D1 = D0(1+g)^1
D2 = D0(1+g)^2
D3 = D0(1+g)^3
D4 = D0(1+g)^4
P5 = D4/(R-g)
9%
6%
P4 = D5/(R-g)
$3*(1.15)^1
$3*(1.15)^2
$3*(1.09)^3
$3*(1.09)^4
(4.23*1.06^1)/(0.08-0.06)
P0
3.194444
P0=3.19+3.4+3.088+3.109+2.804
3.403635
$3.45
$3.97
$3.89
$4.23
$224.19
3.088007
3.109176
infinity
2.804003
coupon rate
coupon (paid quarterly)
n (years)
i.e. number of coupon payments
price of bond
fv
period
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
$
$
12%
30
7
28
972
1,000
outflows
inflows
coupons
-972.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
3.15%
inflows
face value
1,000.00
overall
cash flow
-972.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
30.00
1,030.00
This last column is what you would put in your calculator, and it will return
quarterly period of ) of 3.15%.
i.e. n = 30, pv = -972, pmt = 30 & fv = 1000 ==> compute i , to get 3.15
This is a quarterly rate , so the Nominal Rate is 3.15 * 4 = 12.60%.
But we need to work out the EAR!
ie
(1 + 12.6/400)4 = (1 + EAR)
* 4 = 12.60%.
D0
3
D1
3.45
15%
D2
D3
3.9675 4.324575
$ 16.49
$ 183.63
$ 200.13
9%
PERPETUITY CALCULATIONS
The present value of the perpetual cash flow using the formula C / R - g)
C =
4.996614
r =
0.08
g =
0.06
PV4 =
249.8307 (this is the present value of the perpetuity at time t= 4)
PV0 =
D4
D5
4.713787 4.996614
3.464774
6%
6
infinity
ONS