1. FIN 614: Financial Management Larry Schrenk, Instructor

2. 1.Discounted Cash Flow (DCF) Method 2.Bond Valuation 3.Bond Yields 1.Yield to Maturity (YTM) 2.Yield to Call (YTC) 3.Current Yield

3. Asset Value = PV(Cash Flows) Examples: Stock Price = PV(Dividends) Project Value = PV(Net Annual Cash Flows)

4. Bond Value = PV(Cash Flows) Two Cash Flows: (Semi-Annual) Fixed Coupons Par Value (at Maturity)

5. Bond Value = PV(Coupons) + PV(Par Value) Coupons are an Annuity Par Value is One Time Payment

6. Formula for Bond Valuation PV(Coupons) PV(Par Value)

7. What is the present value of a four year, semi- annual bond with a par value of $1,000.00 and a coupon rate of 8% if the discount rate is 6%?

8. N=8 (= 4 x 2) I%=6 PV=0 ◄ Select @, then [ALPHA] [ENTER] PMT=-40(= (1000 x 0.08)/2) FV=-1000 P/Y=2 C/Y=2 PMT: END BEGIN PV = 1070.20 Note: Negatives

9. Discount rate such that Price = PV(cash flows) Expected return if the bond purchased at a fair value

10. What is the YTM of a five year, semi-annual bond with a par value of $1,000 and a coupon rate of 9% if the bond is selling for $990? N=10 (= 5 x 2) I%=0 ◄ Select @, then [ALPHA] [ENTER] PV=-990 PMT=45 (= (1000 x 0.09)/2) FV=1000 P/Y=2 C/Y=2 PMT: END BEGIN PV (YTM) = 9.25% Note: Negatives

11. YTM = expected return only when just purchased. YTM versus realized/actual yield

12. The yield of a bond if it is called, i.e., you were to buy and hold the security until the call date. Calculation: Same as YTM except: N = Periods to the Call Date (not Maturity) FV = Call Price (not Par Value)

13. What is the YTC of a five year, semi-annual bond with a par value of $1,000 and a coupon rate of 9% if the bond is selling for $990, the call price is $1,100 and the call date is two years? N=4 (= 2 x 2; N is Periods to Call) I%=0 ◄ Select @, then [ALPHA] [ENTER] PV=-990 PMT=45 (= (1000 x 0.09)/2) FV=1100(FV is Call Price) P/Y=2 C/Y=2 PMT: END BEGIN PV (YTM) = 14.09% Note: Negatives

14. Interest payment relative to price Current Yield = Annual Interest Payment / Bond Price It is not the bond’s expected return (that is YTM). YTM = Current Yield + Capital Gains Yield

15. Find the current yield for a 9% annual coupon bond that sells for $887 and has a par value of $1,000. Current Yield = $90 / $887 = 0.1015 = 10.15%

16. FIN 614: Financial Management Larry Schrenk, Instructor