This document discusses valuation methods for long-term securities such as bonds and stocks. It defines key bond terms like maturity value and coupon rate. It explains how to value different types of bonds such as perpetual, coupon-paying, and zero-coupon bonds. For stock valuation, it discusses preferred stock which pays a fixed dividend, and common stock which represents residual ownership. It also presents dividend valuation models for common stock including the constant growth, no growth, and multi-stage growth models. Finally, it analyzes how bond prices behave under different interest rate scenarios.

2. Valuation of Long-TermValuation of Long-Term
SecuritiesSecurities
Prepared By:
Usman ud Din

3. What is Value?What is Value?
Liquidation valueLiquidation value
Going-concern valueGoing-concern value
Book ValueBook Value
Market valueMarket value
Intrinsic valueIntrinsic value

4. Important Bond TermsImportant Bond Terms
A bondbond is a long-term debt instrument
issued by a corporation or government.
Maturity ValueMaturity Value (MV)(MV)
Coupon RateCoupon Rate
Discount RateDiscount Rate (capitalization rate)

5. Different Types of Bonds: -Different Types of Bonds: -
A perpetual bondperpetual bond is a bond that never matures.
It has an infinite life.
V = II / kdkd
A non-zero coupon-paying bondnon-zero coupon-paying bond is a coupon
paying bond with a finite life.
V = I (PVIFA kd, nn) + MV (PVIF kd, nn)
A zero coupon bondzero coupon bond is a bond that pays no
interest but sells at a deep discount from its
face value
MV (PVIFkd, nn)

6. Stock Valuation: -Stock Valuation: -
Preferred Stock is a type of stock that
promises a fixed dividend, but at the
judgment of B.O.D.
V= Divp/kp
Common StockCommon Stock represent residual
ownership position in the corporation.

7. Dividend Valuation Model
 Dividend Valuation Model accounts for the PV
of all future dividends.
V= Div1 + Div2 + …….. Divn + Pricen
(1+ Ke)1
(1+ Ke)2
……. (1+ Ke)n

8. Dividend Discount Models
Constant Growth
VCG= D1
(Ke-g)
No Growth
VZG= D1
Ke
Growth Phases
n ∞
V= ∑ D0(1+g1)t
+ ∑ Dn(1+g2)t
 t=1 (1+ke)t
t=n+1 (1+ke)t

9. Behavior of Bond PricesBehavior of Bond Prices
Discount BondDiscount Bond: -The market required rate
of return exceeds the coupon rate (Par >
P0 ).
Premium BondPremium Bond: -: - The coupon rate exceeds
the market required rate of return (P0 > Par).
Par BondPar Bond: -: -The coupon rate equals the
market required rate of return (P0 = Par).

10. Behavior of Bond PricesBehavior of Bond Prices
When interest rates riserise, then the market
required rates of return riserise and bond prices
will fallfall.
When interest rates fallfall, then the market
required rates of return fallfall and bond prices
will riserise.
The longer the bond maturity, the greater
the change in bond price for a given change
in the market required rate of return.