The document provides an overview and definitions of bonds, interest rates, and equities. It defines a bond as a type of security used to raise capital with characteristics including a principal amount to be repaid at maturity, coupon payments, and an issuer and holder. Bonds are issued by governments, corporations, and other entities and held by pension funds and other investors. Interest rates and stock markets are also discussed at a high level.

1. Finance Lecture:
Bonds, Equities and Interest Rates
Brad Simon

2. Lecture Overview
 Bonds
 Definitions
 Issuers and holders
 Example
 Valuation
 Interest Rates
 Conclusions (bonds and interest rates)
 Equities
 Definition
 Stock Markets
 Valuation
 Conclusion
2

3. Bonds – Definition
3

4. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
4

5. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
5

6. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
6

7. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
 The principal amount is also known as the face value or par
value
7

8. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
 The principal amount is also known as the face value or par
value
 The payment date is known as the maturity date
8

9. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
 The principal amount is also known as the face value or par
value
 The payment date is known as the maturity date
 Many bonds have regular coupon payments which
are paid-out annually, semi-annually or quarterly.
9

10. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
 The principal amount is also known as the face value or par
value
 The payment date is known as the maturity date
 Many bonds have regular coupon payments which
are paid-out annually, semi-annually or quarterly.
 The coupon rate is the interest rate used to calculate the
coupon payment and is a percentage of the principal
amount
10

11. Bonds – Definition
 A bond is a type of security instrument used to
raise capital by an issuing party (an issuer)
 A bond typically has the following characteristics:
 A principal amount to be repaid on a specific date
in the future
 The principal amount is also known as the face value or par
value
 The payment date is known as the maturity date
 Many bonds have regular coupon payments which
are paid-out annually, semi-annually or quarterly.
 The coupon rate is the interest rate used to calculate the
coupon amount and is a percentage of the principal amount
 Coupon Payment = Coupon Rate x Principal
11

12. Bonds – Definition
12

13. Bonds – Definition
 A bond is a legal debt obligation. Failure to
make payments as required can result in legal
recourse by the holders of the bonds.
13

14. Bonds – Definition
 A bond is a legal debt obligation. Failure to
make payments as required can result in legal
recourse by the holders of the bonds.
 A bond may be callable by the issuer
14

15. Bonds – Definition
 A bond is a legal debt obligation. Failure to
make payments as required can result in legal
recourse by the holders of the bonds.
 A bond may be callable by the issuer
 After some specified amount of time or some
specified event, the issuer can purchase the bonds
back from the market.
15

16. Bonds – Definition
 A bond is a legal debt obligation. Failure to
make payments as required can result in legal
recourse by the holders of the bonds.
 A bond may be callable by the issuer
 After some specified amount of time or some
specified event, the issuer can purchase the bonds
back from the market.
 Typically the issuer will have to pay some type of
penalty for this early re-call.
16

17. Bonds – Definition
 A bond is a legal debt obligation. Failure to
make payments as required can result in legal
recourse by the holders of the bonds.
 A bond may be callable by the issuer
 After some specified amount of time or some
specified event, the issuer can purchase the bonds
back from the market.
 Typically the issuer will have to pay some type of
penalty for this early re-call.
 Other features can also exist.
17

18. Bonds – Definition
18

19. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
19

20. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
 The issuance of bonds is known as a bond offering
20

21. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
 The issuance of bonds is known as a bond offering
 Holding Party or Holder – the party who
currently has possession of the bond
21

22. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
 The issuance of bonds is known as a bond offering
 Holding Party or Holder – the party who
currently has possession of the bond
 The holding party receives the payments from the
issuer
22

23. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
 The issuance of bonds is known as a bond offering
 Holding Party or Holder – the party who
currently has possession of the bond
 The holding party receives the payments from the
issuer
 Often, the holding party can freely sell the bond to a
third-party and all rights will transfer
23

24. Bonds – Definition
 Issuing Party or Issuer – the party who has
made the payment promises
 The issuance of bonds is known as a bond offering
 Holding Party or Holder – the party who
currently has possession of the bond
 The holding party receives the payments from the
issuer
 Often, the holding party can freely sell the bond to a
third-party and all rights will transfer
 Effectively, a bond is a loan.
24

25. Bonds – Definition Recap
25

26. Bonds – Definition Recap
 Principal or Face Value
26

27. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
27

28. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
28

29. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
 Legal debt obligation
29

30. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
 Legal debt obligation
 Callable
30

31. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
 Legal debt obligation
 Callable
 Issuing Party or Issuer
31

32. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
 Legal debt obligation
 Callable
 Issuing Party or Issuer
 Bond offering
32

33. Bonds – Definition Recap
 Principal or Face Value
 Maturity Date
 Coupon Rate, Coupon Payment
 Legal debt obligation
 Callable
 Issuing Party or Issuer
 Bond offering
 Holding Party or Holder
33

34. Bonds – Issuers
34

35. Bonds – Issuers
 Bonds are issued by various types of parties:
35

36. Bonds – Issuers
 Bonds are issued by various types of parties:
 Federal governments
36

37. Bonds – Issuers
 Bonds are issued by various types of parties:
 Federal governments
 State and municipal governments
37

38. Bonds – Issuers
 Bonds are issued by various types of parties:
 Federal governments
 State and municipal governments
 Corporations
38

39. Bonds – Issuers
 Bonds are issued by various types of parties:
 Federal governments
 State and municipal governments
 Corporations
 Money Markets
39

40. Bonds – Issuers
 Bonds are issued by various types of parties:
 Federal governments
 State and municipal governments
 Corporations
 Money Markets
 Mortgage-backed and Asset-backed securities
40

41. Bonds – Bondholders
41

42. Bonds – Bondholders
 Bonds are held by various types of parties:
42

43. Bonds – Bondholders
 Bonds are held by various types of parties:
 Pension funds
43

44. Bonds – Bondholders
 Bonds are held by various types of parties:
 Pension funds
 Insurance companies
44

45. Bonds – Bondholders
 Bonds are held by various types of parties:
 Pension funds
 Insurance companies
 University endowments
45

46. Bonds – Bondholders
 Bonds are held by various types of parties:
 Pension funds
 Insurance companies
 University endowments
 Bond funds
46

47. Bonds – Bondholders
 Bonds are held by various types of parties:
 Pension funds
 Insurance companies
 University endowments
 Bond funds
 Individuals
47

48. Bonds – Magnitude
48

49. Bonds – Magnitude
 The bond market is enormous
49

50. Bonds – Magnitude
 The bond market is enormous
 As of 2009, the face value of total bonds
outstanding globally was $82 trillion.
Sources: Asset Allocation Advisor and World Economic Outlook Database
50

51. Bonds – Magnitude
 The bond market is enormous
 As of 2009, the face value of total bonds
outstanding globally was $82 trillion.
 By comparison
 The total value of all global equities (stocks) was $44 trillion.
Sources: Asset Allocation Advisor and World Economic Outlook Database
51

52. Bonds – Magnitude
 The bond market is enormous
 As of 2009, the face value of total bonds
outstanding globally was $82 trillion.
 By comparison
 The total value of all global equities (stocks) was $44 trillion.
 Total global GDP in 2010 was roughly $62 trillion.
Sources: Asset Allocation Advisor and World Economic Outlook Database
52

53. Bonds – Magnitude
 The bond market is enormous
 As of 2009, the face value of total bonds
outstanding globally was $82 trillion.
 By comparison
 The total value of all global equities (stocks) was $44 trillion.
 Total global GDP in 2010 was roughly $62 trillion.
o US GDP was $14.5 trillion or nearly 25% of total GDP
Sources: Asset Allocation Advisor and World Economic Outlook Database
53

54. Bonds – Magnitude
54

55. Bonds – Magnitude
Sources: Asset Allocation Advisor and World Economic Outlook Database
55

56. Bonds – An Example
56

57. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
57

58. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
58

59. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
59

60. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
60

61. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
 Coupon Rate is 5%
61

62. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
 Coupon Rate is 5%
 Coupon Payments are made annually at end of
year
62

63. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
 Coupon Rate is 5%
 Coupon Payments are made annually at end of
year
 Coupon Payment is:
63

64. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
 Coupon Rate is 5%
 Coupon Payments are made annually at end of
year
 Coupon Payment is:
 Principal x Coupon Rate
64

65. Bonds – An Example
 A company wants to raise money for a new
project and decides to do so by issuing bonds
 The characteristics of the bonds are as follows:
 Principal is $1,000
 Maturity Date is 5 years from issuance
 Coupon Rate is 5%
 Coupon Payments are made annually at end of
year
 Coupon Payment is:
 Principal x Coupon Rate
 $1,000 x 5% = $50
65

66. Bonds – An Example
66

67. Bonds – An Example
 Note, we are discussing the characteristics at an
individual bond level. The company has likely
issued a number of these bonds in the offering.
67

68. Bonds – An Example
 Note, we are discussing the characteristics at an
individual bond level. The company has likely
issued a number of these bonds in the offering.
 For example, the company may be issuing $1
million of face value bonds of this characteristic.
68

69. Bonds – An Example
 Note, we are discussing the characteristics at an
individual bond level. The company has likely
issued a number of these bonds in the offering.
 For example, the company may be issuing $1
million of face value bonds of this characteristic.
 This means the company is issuing 1,000
bonds, each with a face value of $1,000.
69

70. Bonds – An Example
70

71. Bonds – An Example
 When issued, some bonds simply sell for their
face value.
71

72. Bonds – An Example
 When issued, some bonds simply sell for their
face value.
 In this case, the company would convey the bond
to the buyer in exchange for receiving $1,000.
72

73. Bonds – An Example
 When issued, some bonds simply sell for their
face value.
 In this case, the company would convey the bond
to the buyer in exchange for receiving $1,000.
 Assuming the buyer holds the bond to maturity he
would receive 5 annual payments of $50 and a
final payment of $1,000 after 5 years.
73

74. Bonds – An Example
 When issued, some bonds simply sell for their
face value.
 In this case, the company would convey the bond
to the buyer in exchange for receiving $1,000.
 Assuming the buyer holds the bond to maturity he
would receive 5 annual payments of $50 and a
final payment of $1,000 after 5 years.
 In other words, the buyer receives annual interest
payments and finally the return of his principal.
74

75. Bonds – Valuation
75

76. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
76

77. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
 Many bonds, however, are issued at a price
higher or lower than their face value.
77

78. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
 Many bonds, however, are issued at a price
higher or lower than their face value.
 Ultimately, the market (i.e. supply and demand)
determines a bond’s price. Sometimes it is willing
to pay more than face value, other times less.
78

79. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
 Many bonds, however, are issued at a price
higher or lower than their face value.
 Ultimately, the market (i.e. supply and demand)
determines a bond’s price. Sometimes it is willing
to pay more than face value, other times less.
 We can make sense of this by applying the Time-
Value-of-Money concept:
79

80. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
 Many bonds, however, are issued at a price
higher or lower than their face value.
 Ultimately, the market (i.e. supply and demand)
determines a bond’s price. Sometimes it is willing
to pay more than face value, other times less.
 We can make sense of this by applying the Time-
Value-of-Money concept:
 The issuing party specifies how much and when
they will make payments.
80

81. Bonds – Valuation
 In the previous slide I said that some bonds are
issued at a price equal to their face value.
 Many bonds, however, are issued at a price higher or
lower than their face value.
 Ultimately, the market (i.e. supply and demand)
determines a bond’s price. Sometimes it is willing to
pay more than face value, other times less.
 We can make sense of this by applying the Time-
Value-of-Money concept:
 The issuing party specifies how much and when they will
make payments.
 The market then applies an interest rate to discount the
specified payments to the present
81

82. Bonds – Valuation
82

83. Bonds – Valuation
 Let’s look at our prior example:
83

84. Bonds – Valuation
 Let’s look at our prior example:
 Face Value of $1,000, payment to be made in 5
years
84

85. Bonds – Valuation
 Let’s look at our prior example:
 Face Value of $1,000, payment to be made in 5
years
 Coupon rate of 5%
85

86. Bonds – Valuation
 Let’s look at our prior example:
 Face Value of $1,000, payment to be made in 5
years
 Coupon rate of 5%
 Annual coupon payments of $50 for five years
86

87. Bonds – Valuation
 Let’s look at our prior example:
 Face Value of $1,000, payment to be made in 5
years
 Coupon rate of 5%
 Annual coupon payments of $50 for five years
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
87

88. Bonds – Valuation
88

89. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
89

90. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
90

91. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
91

92. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
Year Payment PVIF PV
0 $ -
1 $ 50 0.952 $ 48
2 $ 50 0.907 $ 45
3 $ 50 0.864 $ 43
4 $ 50 0.823 $ 41
5 $ 1,050 0.784 $ 823
Present Value: $ 1,000
92

93. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
Year Payment PVIF PV
0 $ -
1 $ 50 0.952 $ 48
2 $ 50 0.907 $ 45
3 $ 50 0.864 $ 43
4 $ 50 0.823 $ 41
5 $ 1,050 0.784 $ 823
Present Value: $ 1,000
93

94. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
Year Payment PVIF PV
0 $ -
1 $ 50 0.952 $ 48
2 $ 50 0.907 $ 45
3 $ 50 0.864 $ 43
4 $ 50 0.823 $ 41
5 $ 1,050 0.784 $ 823
Present Value: $ 1,000
94

95. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
Year Payment PVIF PV
0 $ -
1 $ 50 0.952 $ 48
2 $ 50 0.907 $ 45
3 $ 50 0.864 $ 43
4 $ 50 0.823 $ 41
5 $ 1,050 0.784 $ 823
Present Value: $ 1,000
95

96. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 5%
Year Payment PVIF PV
0 $ -
1 $ 50 0.952 $ 48
2 $ 50 0.907 $ 45
3 $ 50 0.864 $ 43
4 $ 50 0.823 $ 41
5 $ 1,050 0.784 $ 823
Present Value: $ 1,000
96

97. Bonds – Valuation
97

98. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$1,000 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 5%.
98

99. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$1,000 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 5%.
 When the bond valuation (i.e. the price) is equal
to the face value we say the bond is “selling at
par value.”
99

100. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$1,000 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 5%.
 When the bond valuation (i.e. the price) is equal
to the face value we say the bond is “selling at
par value.”
 Now, what happens if the market applies an
interest rate of 7%? How much would the
previous bonds be valued at?
100

101. Bonds – Valuation
101

102. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
102

103. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 7%
103

104. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 7%
104

105. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Year Payment PVIF PV
i = 7%
0 $ -
1 $ 50 0.935 $ 47
2 $ 50 0.873 $ 44
3 $ 50 0.816 $ 41
4 $ 50 0.763 $ 38
5 $ 1,050 0.713 $ 749
Present Value: $ 918
105

106. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Year Payment PVIF PV
i = 7%
0 $ -
1 $ 50 0.935 $ 47
2 $ 50 0.873 $ 44
3 $ 50 0.816 $ 41
4 $ 50 0.763 $ 38
5 $ 1,050 0.713 $ 749
Present Value: $ 918
106

107. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Year Payment PVIF PV
i = 7%
0 $ -
1 $ 50 0.935 $ 47
2 $ 50 0.873 $ 44
3 $ 50 0.816 $ 41
4 $ 50 0.763 $ 38
5 $ 1,050 0.713 $ 749
Present Value: $ 918
107

108. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Year Payment PVIF PV
i = 7%
0 $ -
1 $ 50 0.935 $ 47
2 $ 50 0.873 $ 44
3 $ 50 0.816 $ 41
4 $ 50 0.763 $ 38
5 $ 1,050 0.713 $ 749
Present Value: $ 918
108

109. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Year Payment PVIF PV
i = 7%
0 $ -
1 $ 50 0.935 $ 47
2 $ 50 0.873 $ 44
3 $ 50 0.816 $ 41
4 $ 50 0.763 $ 38
5 $ 1,050 0.713 $ 749
Present Value: $ 918
109

110. Bonds – Valuation
110

111. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$$918 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 7%.
111

112. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$$918 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 7%.
 When the bond valuation is below the face value
we say the bond is “selling at discount to par
value.”
112

113. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$$918 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 7%.
 When the bond valuation is below the face value
we say the bond is “selling at discount to par
value.”
 Now, what happens if the market decides the
interest rate should be 3%? How much would the
previous bonds be valued at?
113

114. Bonds – Valuation
114

115. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
115

116. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 3%
116

117. Bonds – Valuation
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
i = 3%
Year Payment PVIF PV
0 $ -
1 $ 50 0.971 $ 49
2 $ 50 0.943 $ 47
3 $ 50 0.915 $ 46
4 $ 50 0.888 $ 44
5 $ 1,050 0.863 $ 906
Present Value: $ 1,092
117

118. Bonds – Valuation
118

119. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$$1,092 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 3%.
119

120. Bonds – Valuation
 Based on the TVM, we would be willing to pay
$$1,092 to receive five annual payments of $50
and a final payment of $1,000 after five
years, assuming an interest rate of 3%.
 When the bond valuation is below the face value
we say the bond is “selling at premium to par
value.”
120

121. Bonds – Valuation Summary
121

122. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
122

123. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5%
123

124. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
124

125. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3%
125

126. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3%
Bond price
today is
$1,092
126

127. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3% i = 5%
Bond price
today is
$1,092
127

128. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3% i = 5%
Bond price Bond price
today is today is
$1,092 $1,000
128

129. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3% i = 5% i = 7%
Bond price Bond price
today is today is
$1,092 $1,000
129

130. Bonds – Valuation Summary
Y 0
ear Y 1
ear Y 2
ear Y 3
ear Y 4
ear Y 5
ear
? $50 $50 $50 $50 $1,050
Coupon Rate = 5% Face Value =
$1,000
i = 3% i = 5% i = 7%
Bond price Bond price Bond price
today is today is today is $918
$1,092 $1,000
130

131. Bonds – Valuation Conclusions
131

132. Bonds – Valuation Conclusions
 We use the TVM to value a bond’s price today
132

133. Bonds – Valuation Conclusions
 We use the TVM to value a bond’s price today
 The time-frame, coupon payments and the final
principal payment are specified by the bond
issuer. These represents a future cash flow.
133

134. Bonds – Valuation Conclusions
 We use the TVM to value a bond’s price today
 The time-frame, coupon payments and the final
principal payment are specified by the bond
issuer. These represents a future cash flow.
 The numerator of the TVM
134

135. Bonds – Valuation Conclusions
 We use the TVM to value a bond’s price today
 The time-frame, coupon payments and the final
principal payment are specified by the bond
issuer. These represents a future cash flow.
 The numerator of the TVM
 The market will then apply an interest rate to the
above cash flow to calculate their present value
(the bond’s price today)
135

136. Bonds – Valuation Observations
136

137. Bonds – Valuation Observations
 Valuing a bond is the same as calculating the
present value of an annuity + and the PV of a
single payment
137

138. Bonds – Valuation Observations
 Valuing a bond is the same as calculating the
present value of an annuity + and the PV of a
single payment
 5 annual payments of $50 at a given interest rate
138

139. Bonds – Valuation Observations
 Valuing a bond is the same as calculating the
present value of an annuity + and the PV of a
single payment
 5 annual payments of $50 at a given interest rate
 A payment of $1,000 in 5 years at a given interest
rate
139

140. Bonds – Valuation Observations
 Valuing a bond is the same as calculating the
present value of an annuity + and the PV of a
single payment
 5 annual payments of $50 at a given interest rate
 A payment of $1,000 in 5 years at a given interest
rate
 PV(Bond) = PVA(Coupon Payments) + PV(Face
Value)
140

141. Interest Rates
141

142. Interest Rates
 I keep using the term, “interest rate” and it
appears to mean different things depending on
the use.
142

143. Interest Rates
 I keep using the term, “interest rate” and it
appears to mean different things depending on
the use.
 Unfortunately, there are many terms for the same
concept
143

144. Interest Rates
 I keep using the term, “interest rate” and it
appears to mean different things depending on
the use.
 Unfortunately, there are many terms for the same
concept
 And there are many concepts that use the same
name
144

145. Interest Rates
 I keep using the term, “interest rate” and it
appears to mean different things depending on
the use.
 Unfortunately, there are many terms for the same
concept
 And there are many concepts that use the same
name
 Back in our bond calculations, the market interest
rate which was the denominator of our TVM
analysis is also known as the “yield to maturity”
(YTM) or simply “yield”.
145

146. Interest Rates
 I keep using the term, “interest rate” and it
appears to mean different things depending on
the use.
 Unfortunately, there are many terms for the same
concept
 And there are many concepts that use the same
name
 Back in our bond calculations, the market interest
rate which was the denominator of our TVM
analysis is also known as the “yield to maturity”
(YTM) or simply “yield”.
146  People will also use the term “discount rate” or

147. Interest Rates
147

148. Interest Rates
 To make it even more confusing, there are many
different interest rates in an economy
148

149. Interest Rates
 To make it even more confusing, there are many
different interest rates in an economy
 The interest rate the government is charged to
borrow money is lower than the interest rate I am
charged on my credit card
149

150. Interest Rates
 To make it even more confusing, there are many
different interest rates in an economy
 The interest rate the government is charged to
borrow money is lower than the interest rate I am
charged on my credit card
 Companies with good investment opportunities
and lots of cash have lower interest rates for their
corporate debt than companies few growth
opportunities and no cash.
150

151. Interest Rates
 To make it even more confusing, there are many
different interest rates in an economy
 The interest rate the government is charged to
borrow money is lower than the interest rate I am
charged on my credit card
 Companies with good investment opportunities
and lots of cash have lower interest rates for their
corporate debt than companies few growth
opportunities and no cash.
 Interest rates for the exact same security will
change over time
151

152. Interest Rates
 To make it even more confusing, there are many
different interest rates in an economy
 The interest rate the government is charged to
borrow money is lower than the interest rate I am
charged on my credit card
 Companies with good investment opportunities
and lots of cash have lower interest rates for their
corporate debt than companies few growth
opportunities and no cash.
 Interest rates for the exact same security will
change over time
 Interest rates of identical securities except their
152
times to maturity will have different interest rates

153. Interest Rates
153

154. Interest Rates
 But in all these cases, the interest rate will
increase when a given risk increases and
decrease when a given risk decreases.
154

155. Interest Rates
 But in all these cases, the interest rate will
increase when a given risk increases and
decrease when a given risk decreases.
 The logic is simple:
155

156. Interest Rates
 But in all these cases, the interest rate will
increase when a given risk increases and
decrease when a given risk decreases.
 The logic is simple:
 In the face of multiple investment or lending
opportunities, if we are not compensated for
additional risk we will always put our money in the
least risky opportunity.
156

157. Interest Rates
 But in all these cases, the interest rate will
increase when a given risk increases and
decrease when a given risk decreases.
 The logic is simple:
 In the face of multiple investment or lending
opportunities, if we are not compensated for
additional risk we will always put our money in the
least risky opportunity.
 We need to be induced to invest or lend to the
riskier situation by the promise of higher returns.
157

158. Interest Rates
158

159. Interest Rates
 The interest rate is a function of a number of
factors:
159

160. Interest Rates
 The interest rate is a function of a number of
factors:
 The prevailing market interest rates (including the
“real” interest rate)
160

161. Interest Rates
 The interest rate is a function of a number of
factors:
 The prevailing market interest rates (including the
“real” interest rate)
 Inflation risks
161

162. Interest Rates
 The interest rate is a function of a number of
factors:
 The prevailing market interest rates (including the
“real” interest rate)
 Inflation risks
 Repayment or default risks expectations
162

163. Interest Rates
 The interest rate is a function of a number of
factors:
 The prevailing market interest rates (including the
“real” interest rate)
 Inflation risks
 Repayment or default risks expectations
 Liquidity risk
163

164. Interest Rates
 The interest rate is a function of a number of
factors:
 The prevailing market interest rates (including the
“real” interest rate)
 Inflation risks
 Repayment or default risks expectations
 Liquidity risk
 Other risk factors
164

165. Interest Rates
165

166. Interest Rates
 Back in our example of the 5 year bond we
calculated the price using three different interest
rates, 3%, 5% and 7%.
166

167. Interest Rates
 Back in our example of the 5 year bond we
calculated the price using three different interest
rates, 3%, 5% and 7%.
 We can interpret the difference in interest rates as
different risk assessments related to the bond’s
cash flows.
167

168. Interest Rates
 Back in our example of the 5 year bond we
calculated the price using three different interest
rates, 3%, 5% and 7%.
 We can interpret the difference in interest rates as
different risk assessments related to the bond’s
cash flows.
 For example, we might apply a higher rate of 7%
if we are concerned the company might not
actually make the payments (default risk).
168

169. Interest Rates
 Back in our example of the 5 year bond we
calculated the price using three different interest
rates, 3%, 5% and 7%.
 We can interpret the difference in interest rates as
different risk assessments related to the bond’s
cash flows.
 For example, we might apply a higher rate of 7%
if we are concerned the company might not
actually make the payments (default risk).
 Or maybe we are concerned that inflation will
increase and so we need extra compensation.
169

170. Conclusions
170

171. Conclusions
 The lower the interest rate, the higher a bond’s
(or any security’s) price today.
171

172. Conclusions
 The lower the interest rate, the higher a bond’s
(or any security’s) price today.
 Conversely, the higher the interest rate, the lower
the bond’s price today.
172

173. Conclusions
 The lower the interest rate, the higher a bond’s
(or any security’s) price today.
 Conversely, the higher the interest rate, the lower
the bond’s price today.
 Higher interest rates have built-in “additional
compensation” compared to lower interest rates.
173

174. Conclusions
 The lower the interest rate, the higher a bond’s
(or any security’s) price today.
 Conversely, the higher the interest rate, the lower
the bond’s price today.
 Higher interest rates have built-in “additional
compensation” compared to lower interest rates.
 The additional compensation will relate to some
type of additional perceived risk related to the
underlying cash flow.
174

175. Equities
175

176. Equities
 Equity securities (stocks) represent ownership in
a corporation
176

177. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
177

178. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
 They have a claim on cash flows only after all other
claimants (employees, suppliers, debtholders, the
government) have been paid
178

179. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
 They have a claim on cash flows only after all other
claimants (employees, suppliers, debtholders, the
government) have been paid
 At any point in time the market value of a firm’s
common stock depends on many factors
including:
179

180. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
 They have a claim on cash flows only after all other
claimants (employees, suppliers, debtholders, the
government) have been paid
 At any point in time the market value of a firm’s
common stock depends on many factors
including:
 The company’s profitability (cash flows)
180

181. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
 They have a claim on cash flows only after all other
claimants (employees, suppliers, debtholders, the
government) have been paid
 At any point in time the market value of a firm’s
common stock depends on many factors
including:
 The company’s profitability (cash flows)
 The company’s growth potential
181

182. Equities
 Equity securities (stocks) represent ownership in
a corporation
 Common stockholders are residual claimants
 They have a claim on cash flows only after all other
claimants (employees, suppliers, debtholders, the
government) have been paid
 At any point in time the market value of a firm’s
common stock depends on many factors
including:
 The company’s profitability (cash flows)
 The company’s growth potential
 Current market interest rates
182

183. Stock Markets
183

184. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
184

185. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
185

186. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
 New York Stock Exchange (NYSE)
186

187. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
 New York Stock Exchange (NYSE)
 NASDAQ
187

188. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
 New York Stock Exchange (NYSE)
 NASDAQ
 London Stock Exchange
188

189. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
 New York Stock Exchange (NYSE)
 NASDAQ
 London Stock Exchange
 Private trading floors (the major banks).
189

190. Stock Markets
 Stock exchanges provide liquidity: the ability for
owners of common stock to convert their shares
into cash at any time.
 This liquidity allows buyers and sellers the means
to transact with each other and gives people the
confidence to buy shares in the first place.
 New York Stock Exchange (NYSE)
 NASDAQ
 London Stock Exchange
 Private trading floors (the major banks).
 Largest private trading floor in the world is at UBS (a Swiss
Bank), located in Stamford, CT.
190

191. Stock Markets
 UBS Trading floor – Stamford, CT
191

192. Stock Markets
 UBS Trading floor – Stamford, CT
Your
Instructor
192

193. Stock Valuation
193

194. Stock Valuation
 We would like to use our TVM tool to value stocks.
194

195. Stock Valuation
 We would like to use our TVM tool to value stocks.
 For example, when valuing bonds we discounted
the promised future payments of the bond by an
appropriate interest rate (discount rate) to arise at
the present value (i.e. the market price) of bond.
195

196. Stock Valuation
 We would like to use our TVM tool to value stocks.
 For example, when valuing bonds we discounted
the promised future payments of the bond by an
appropriate interest rate (discount rate) to arise at
the present value (i.e. the market price) of bond.
 Unfortunately, for stocks the issuer has not
promised any specific payments so it is not obvious
what values we should use for our future cash flows
(i.e. the numerator of the TVM analysis).
196

197. Stock Valuation
 We would like to use our TVM tool to value stocks.
 For example, when valuing bonds we discounted
the promised future payments of the bond by an
appropriate interest rate (discount rate) to arise at
the present value (i.e. the market price) of bond.
 Unfortunately, for stocks the issuer has not
promised any specific payments so it is not obvious
what values we should use for our future cash flows
(i.e. the numerator of the TVM analysis).
 This makes it harder to value stocks.
197

198. Stock Valuation
 We would like to use our TVM tool to value stocks.
 For example, when valuing bonds we discounted
the promised future payments of the bond by an
appropriate interest rate (discount rate) to arise at
the present value (i.e. the market price) of bond.
 Unfortunately, for stocks the issuer has not
promised any specific payments so it is not obvious
what values we should use for our future cash flows
(i.e. the numerator of the TVM analysis).
 This makes it harder to value stocks.
 But not impossible.
198

199. Stock Valuation – A First Cut
199

200. Stock Valuation – A First Cut
 Let’s we are trying to value a company’s stock in
which we expect a dividend to be paid.
200

201. Stock Valuation – A First Cut
 Let’s we are trying to value a company’s stock in
which we expect a dividend to be paid.
 We can look at historic dividend payments to get
a sense of how much the dividend in the future
might be.
201

202. Stock Valuation – A First Cut
 Let’s we are trying to value a company’s stock in
which we expect a dividend to be paid.
 We can look at historic dividend payments to get
a sense of how much the dividend in the future
might be.
 Let’s assume the company is “mature” and the
dividends are expected to be the same, forever.
202

203. Stock Valuation – A First Cut
 Let’s we are trying to value a company’s stock in
which we expect a dividend to be paid.
 We can look at historic dividend payments to get
a sense of how much the dividend in the future
might be.
 Let’s assume the company is “mature” and the
dividends are expected to be the same, forever.
 If we assume a dividend of $2.00 (based on our
historic analysis of dividends paid-out by this
company) then what we are really saying is every
year we expect a $2.00 dividend payment,
203
forever.

204. Stock Valuation – Dividend Discount
Model
204

205. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
205

206. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
206

207. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
207

208. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
208

209. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
209

210. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
210

211. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
211

212. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
 Let’s Assume a discount rate of 12%
212

213. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
 Let’s Assume a discount rate of 12%
 PV = $2.00 / 0.12
213

214. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
 Let’s Assume a discount rate of 12%
 PV = $2.00 / 0.12 = $16.67
214

215. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
 Let’s Assume a discount rate of 12%
 PV = $2.00 / 0.12 = $16.67
 The value of such a stock is $16.67
215

216. Stock Valuation – Dividend Discount
Model
 A $2.00 dividend in perpetuity:
Year 1: $2.00
Year 2: $2.00
Year 3: $2.00
Continue forever
 Valuing this is simply valuing a perpetuity:
 PV = Annual Payment / Discount Rate
 Let’s Assume a discount rate of 12%
 PV = $2.00 / 0.12 = $16.67
 The value of such a stock is $16.67
 The Dividend Discount Model
216

217. Stock Valuation – Dividend Discount
Model
217

218. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
218

219. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
219

220. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
220

221. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
 PV = Dividend this year x (1 + g) / (r – g)
221

222. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
 PV = Dividend this year x (1 + g) / (r – g)
 Let’s say our growth rate is 3%
222

223. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
 PV = Dividend this year x (1 + g) / (r – g)
 Let’s say our growth rate is 3%
 PV = $2.00 x (1.03) / (12% - 3%)
223

224. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
 PV = Dividend this year x (1 + g) / (r – g)
 Let’s say our growth rate is 3%
 PV = $2.00 x (1.03) / (12% - 3%)
 PV = $2.06 / 9%
224

225. Stock Valuation – Dividend Discount
Model
 We could build on this model to make it more
versatile.
 For example, we might assume that this is an
established but growing company.
 If we can estimate (or assume) a constant growth
rate (g) we could value the stock using a
perpetuity with constant growth:
 PV = Dividend this year x (1 + g) / (r – g)
 Let’s say our growth rate is 3%
 PV = $2.00 x (1.03) / (12% - 3%)
 PV = $2.06 / 9%
225  PV = $22.89

226. Stock Valuation – Comparison
226

227. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
227

228. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
 Constant Dividend: $16.67
228

229. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
 Constant Dividend: $16.67
 Constant Growth: $22.89
229

230. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
 Constant Dividend: $16.67
 Constant Growth: $22.89
 The growth assumption gave us an extra $6.22
per share of value (or 37% more).
230

231. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
 Constant Dividend: $16.67
 Constant Growth: $22.89
 The growth assumption gave us an extra $6.22
per share of value (or 37% more).
 Growth is good!
231

232. Stock Valuation – Comparison
 Let’s compare the values to see the difference:
 Constant Dividend: $16.67
 Constant Growth: $22.89
 The growth assumption gave us an extra $6.22
per share of value (or 37% more).
 Growth is good!
 This is why managers of companies are
constantly trying (encouraged) to grow their
businesses.
232

233. Stock Valuation – Extensions
233

234. Stock Valuation – Extensions
 There are many extensions to this basic model.
234

235. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
235

236. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
236

237. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
237

238. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
 For example, a common extension is to split our
time horizon into two parts:
238

239. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
 For example, a common extension is to split our
time horizon into two parts:
 A high-growth phase in the early years
239

240. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
 For example, a common extension is to split our
time horizon into two parts:
 A high-growth phase in the early years
 A slow but steady growth phase from then on out
240

241. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
 For example, a common extension is to split our
time horizon into two parts:
 A high-growth phase in the early years
 A slow but steady growth phase from then on out
 High Growth Period + Steady Growth Period
241

242. Stock Valuation – Extensions
 There are many extensions to this basic model.
 But the essential ingredients involve what we
have just seen:
 An estimated dividend
 An estimation of growth
 For example, a common extension is to split our
time horizon into two parts:
 A high-growth phase in the early years
 A slow but steady growth phase from then on out
 High Growth Period + Steady Growth Period
 We can value each period separately using the prior
242
methods and simply add each component together

243. Conclusion - Equities
243

244. Conclusion - Equities
 If there is any residual value after paying back all
outstanding obligations
(payroll, taxes, loans, etc.), it is owned by the
shareholders.
244

245. Conclusion - Equities
 If there is any residual value after paying back all
outstanding obligations
(payroll, taxes, loans, etc.), it is owned by the
shareholders.
 Equities are bought and sold in stock markets just
like bonds are bought and sold in bond markets.
245

246. Conclusion - Equities
 If there is any residual value after paying back all
outstanding obligations
(payroll, taxes, loans, etc.), it is owned by the
shareholders.
 Equities are bought and sold in stock markets just
like bonds are bought and sold in bond markets.
 We can value stocks by taking the present value
of any future estimated dividends, accounting for
growth, and using an appropriate discount rate.
246

247. Conclusion - Equities
 If there is any residual value after paying back all
outstanding obligations
(payroll, taxes, loans, etc.), it is owned by the
shareholders.
 Equities are bought and sold in stock markets just
like bonds are bought and sold in bond markets.
 We can value stocks by taking the present value
of any future estimated dividends, accounting for
growth, and using an appropriate discount rate.
247