CF's of Bonds

Face value notional value reference value N

Coupons coupon rate d based on N not A
different frequencies
advance or arrears
for n terms
Redemption value credeption rate r
redeemed at
par facevalue re
on a date payable in parts
range
Gross yield ignore tax
Net tax FRY
yield incorporate

PV of bond A AN ant rNv

Income Tax
Assume coupons attract income tax
as it is earned
deferred for specific period
Payable
aggregated per tax year payable n months afterfinancial end
year
Use net redemption yield WRY

Income tax payable as earned

A dNan run t xdNaacp
t

Incl t anime rn rn

Income tax deferred

A dwarf't rNun tix dNan v A C Kirk an erNun
Aggregated per tax year
A dwarf't rNun tix dNan v

EÉÉ É is it

Tyger
is i
tax dNx
301.1341
V a tush
3quarterly
I
fullyears
Tt quarterly
payment in
pity'fiscal last
yess
year

Capital gains tax

Redemption price Purchase Capital gain
price
tax rate only applied on gain
assume no loss offset it no
gain
Reduces purchase price if thereis a capital
gain
If you hold gov bond to maturity Redemption
price fixed
as it is earned
deferred for specific period
Payable

If tax fitted t.on rpurciaseliiino.se o redemption Purchase k gears

CGT payable when realised

A IN an tr Non tax rn A un

solve for A
 CG test

an
A
É
drei than run
uh 1 ich and
E Tiedempt.nu

A dna t an rn 1 an must be able to do

ifadiherentscenari
A CdNCI tD
rNiCmJamIMxr
O .rN
and so

LINC ti Nim O A rn CGT

ICP i ti

INC ti r Nien O A rn No CGT

ice c f CI ti
y A rn No CGT
in f Ci ti

Indexation of capital gains

Redemption value not comparable to purchase price
Time value of money

Capital gains rn A x It
gindexation
Tincreases purchase price

Optional redemption dates

In a date over few dates on a diff date etc
Determine worst possible time to redeem
Calc price with this scenario
Thus receive assumed NRY or better
Want to receive a capital gain as soon as possible
Want to defer a capital loss as far as possible
Do CGT test
A Crn assume worst case scenario deferred redemption
A rn assume worst case scenario early redemption
 P C Redemption without tax PLRedemption with tax

Uncertain income securities

Property shares
Rent dividends Income tax
Selling CAT
Deterministic models

Share valuation
D last dividend
paid
g annual growth in divident
i gross net yield

Dividend Growth Model Gordon Growth Model

PU D leg
i
g
assumptions dividends
paid until perpetuity
g Li for converges

Find Past trends characteristics of

g experts company

limitations constant growth rate in dividends

assume
gli for model to exist perpetuity

sensitive to i
g
CGT does not apply to DGM since dividends earned to perp but
still apply in reality
expected return on equity expected return in money markets
 Property Valuation
Rent always in advance
D annual rental income
p p thy rental income
g annual growth
i gross net yield

expected return on property expected return in money markets

Real interest rates

real nominal inflation i d int constant
inflation over period of time

hopefully purchasing power to

3 purchasing power to
nominal inflation in
decreasing purchasing power

Inflation calculation
it inf 8 Qu price index at time t

Real cashflow
purchasing power of cashflow
not discounted

nominal CF X it inflation real CF

nominal CF x Ed real CF

Calculating present values

Nominal CF's use nominal
yields
Real cashflows use real yields
Types of yields
anoint
Net nominal yield tax no inflation
Gross real yield no tax inflation
tax inflation
once yield is specified for an EV tranform all CF's
to that yield correctly incorporateexclude int d tax
If not given assume gross
If not given assume nominal

Real value of CF Cf It inflation

PV of the real value of CF CF It inflation ltireal
Real rate of 81 return was 8t more than inflation
 Index linked bonds

Property
equity naturally increase with time Bonds typically don't

Both coupons redemption can be subject to index linked payments

Can be index inflation productivity etc
any
Only
inflation index can be used to calculate real CF's

Remember 10 101WE toC v lol Ju't

O A
I Qa D Dx 8
2
3
012
QB Y D
D
Dx EE
DX 8
4 QU D Dx 8
g A R

ILB with lagged period

Qt
0 A Ax A
I
2
Qa
012 Y D
D
Dx
Dx
É
8
3 QB D DX 8
4 QU D Dx 8
g QS ATR Dtr x
CPI often not available
yet
ILB for flows
real cash

O A A A
1 Qa D Dx 8 DxÉxÉÉ D
2 012 D Dx 8 Dx 8 D
3 QB D DX 8 Dx x D
4 QU D Dx 8 Dx8 x D
g QS ATR Dtr x Ed DtrxÉ x F Dtr
only it bond is linked to an inflation index

CPI has annual values but payments are monthly linear difference

t Index Reference Tahiti's Real CF

I Qu
O QC A Ax A A
i
2
an
012
f D
a fox
Dx Ed
ox
Dx x
8
3 Q3 D Dx 8 Dx FIX 8
4 QU D Dx 8 g y
g QS ATR Dtr EI Dtr x EH ES

t CPI
4 154
3 162
169
I 166 27,50 with2yearlag Yu
170 7.5 É
d
0
Janie 3 c
2 1 68 II p 2.511.1
Eu
DeterredTax P 100001 2 444 494544 4.111000001 Ev3
4500 141 vet Yu'tExodus lmaooooc no v E

t CPI bmonth annual coupon

lag
z 102
104
I 105
0 107
110 first coupon d Eu
1 114 dCIE
2 115 d Yy
 Exam
style question

PV 20000 as 3500009 100000

inflation 5t Syear then Gt

NPV for real yied at lot

real yield real cashll.us

20 000 x lots v2
I l.ostxl.li 95l
q
20000ft.osiPVontHw
l Atos if
H 1 ios
6257.01885 A
Ctm ioIxi.li.dm
PVinHws
v350000Ctos54t1f1 CIosCt.D
I cosCH
ussoococ.to
Y EEYEIY
393398.0169 B X
i PV D A 100 Coo
227140.9981 x 15 142.90
 Exam style question

a A E ai
645 17
t 2000r's

b 500 Ey a zooov's V o E a 103 2000500 v

f i 75 is E a 20000 450 te 500

Exam style question

a PV 45000742 a it IF e

j II I

PV 1800000 an j 1200000

b PVeax O
t
1800000in 100000 o.is
180000 gym I 100000 cons v37
900000 4 9000011 la il loooooJ0 1sv
a'off90000C a 1 1.1123 cooocyo.su

18000095 is v t 11 v3 t t
100000 cons U't v3 t t
it11 v27
2
do 9000010.15 Htt v4 t t

100000CoIs V'Et v4 Ft I
100 000 Co 5 C V'hev29 v3 ht t
go.si 90000 VE v2 t

Does create Give for

 q ye
Exam style question agg tax
N I 000 000
d 127 monthly arrears
n 20 years
t Got I Mor 28 Feb payable 31 Aug
r 1 redeemable for N

Q Price of bond on 1 Oct 2010

with N RY 131

A 0.12 1000000 9204 10000005

13

0.4 0.12 1000 ooo x E Vh

Vh O 12 1000000 0 4 am
0.4 0.12 1000000 72320 E

A 120 000 and t 1000 000 v20

407 X 50 000 Vitz
404 X 120 000 am V'd
40 t X 70 000 V20

R 661 091 60

Anne
Companies issues bond to avoid selling shares losing stakeincampy

p dividend.int
Capital gains tax
 Exam style question 12.127
10300
1000 12 1 quarterly advance
I I
0
972

a Trading at R 2500 find GRY

12500 1200 dq.cz 1030011974

By
linear interpolation GRY I 8.87

b Determine whether there will be a capital gain or capital loss

on redemption

A 1200 628.51 aa.is trNv9.2s

1200 10715 dxi a real x
Nas
l E dx ri 70

Capital loss
No CGT

c
 Exam style questions

A 10.757,4000 a.si 0.752000 15.4.24

T V 105000
80

A 4000 and 20004.025 1

110,121
V 105000
79 841.19

Pr 4000 t 4000 ta t t Gooo too t

2000 0.75 2000 as cons
1,14 3
us 0.85 82000 ai co 8s
29 114 V's't o
V's 105000 10 105000 80 000