2. BOND
• A long-term debt instrument in which a borrower agrees to
make payments of principal and interest, on specific dates,
to the holders of the bond.
• Bond is used by corporation or government to raise money.
• The issuer will buy back the bond from buyer with principal
value when the bond matures.
3. KEY FEATURES OF A BOND
• Par or Face value - The amount of money (Principal) that need to
pay by borrower at the end of maturity date. The Par value is
usually RM 1,000.
• Coupon rate - Interest rate that need to be paid by issuer of the
bond to bondholders. It is usually in percentage term.
• Coupon payment - Periodic interest payment paid by issuer to
bondholders. Its can be paid either annually or semi annually. It
can be calculated by coupon rate x Par value.
• Maturity Period- The number of years before bond matured. Over
this period, the issuer is obliged to pay coupon payment to
bondholders. At the end of maturity date, the issuer will buy back
the bond with face value and coupon payment.
4. • Help investors to calculate true value of Bond
• Help investors to make decision
BOND VALUATION
5. VB = Valuation of bond
C = Coupon payment
M = Par Value
i = Interest
n = Years
VALUE OF BOND (VB)
VB = C (PVIFA i,n ) + M (PVIF i,n )
6. • Calculate the market value of price of a 5-year RM 1,000
bond with an 8% coupon rate and the investor required rate
of return is 6%.
Vb = 80(4.2124) + 1000(0.7473)
= 336.99+747.30
= RM1,084.29
7. • Calculate the market value of price of a 5-year RM 1,000
bond with an 8% coupon rate and the investor required rate
of return is 10%.
Vb = 80(3.7908) + 1000(0.6209)
= 303.26 + 620.90
= RM924.16
8. Bond
prices
Par – Purchase price
equals to principal
amount
Discount - Purchase price
less than principal
amount
Premium - Purchase
price higher than
principal amount
9. • Calculate the market value of price of a 5-year RM
1,000 bond with an 8% coupon rate and the investor
required rate of return is 10% semi-annually.
VB = C/2 (PVIFA i/2,nx2) + M(PVIF i/2,nx2)
10. Prima Bhd issue a 2 year bond that pays 4% coupon rate semi
annually. Given par value RM 1,000. Calculate the value of
bond if the investor required rate of return is 14%.
11. YTM = Yield to maturity
C = Coupon payment
M = Par value
MP = Market price
YIELD TO MATURITY
YTM = C + ( M – MP)/n
( M + MP)/2
12. • Calculate the yield to maturity (YTM) when the bonds sells for
RM1,080 has 10 percent coupon interest rate and par value is
RM1,000.the call price is rm1,250 with remaining years is 3.
The maturity is 10 years.
YTM = 100 + [1000-1080]/10
[1000+1080]/2
= 92
1,040
= 8.85%
13. • Semi annually
YIELD TO MATURITY
YTM = C/2 + ( M – MP)/nx2
( M + MP)/2
YTM = Yield to maturity
C = Coupon payment
M = Par value
MP = Market price
14. Calculate the yield to maturity (YTM) when the bonds sell
for RM1080 that pays semi annually 10% coupon interest
rate and par value is RM 1000. The bonds will be matured
after 10 years.
YTM = RM 50 + (RM 1000 – RM 1080)/20
(RM 1000 + RM 1080)/2
= RM46/RM 1040
= 4.42%
15. • Annually
YIELD TO CALL
YTC = C+ ( CP – MP)/n
(CP + MP)/2
C = Coupon payment
CP = Callable Price
MP = Market price
N =
16. Compute the yield to call (YTC). 20 years, 12% coupon
bond trading at RM1100with 5 years remaining to it
first call and the call price at RM1020.
YTC = (12%xRm1000) + (RM 1020 – RM 1100)/5
(RM1020 + RM1100)/2
= RM104/RM 1060
= 9.81%
17. • Measure of a bond’s cash return for the year.
• Relates the annual coupon interest to the market
price.
CY = annual coupon / market price
• 10% coupon bond, with semi-annual coupons, face
value of 1,000, 20 years to maturity, $1,197.93
price
Current yield = 50 / 1197.93 = .0417 = 4.17%
CURRENT YIELD (CY)
18. • Find the current yield for a 10-year, 9% annual coupon
bond that sells for $887, and has a face value of
$1,000.
19. 5. SUMMARY
• Valuation of debt securities enables the firm to make
comparisons and select the method of financing which
is most cost-effective or the most viable investments
• Understanding of factors that can affect the value of
debt securities will help the firm to decide whether
issuing debt securities is a better option compared to
other alternatives
20. QUIZ TIME
• A corporate bond has an 11.5%
coupon rate, 20 years to maturity
and a par value of RM1,000.
Compute the value of the bond:
a) at 10% required rate of
return (rate of interest)
b) at 12% required rate of
return (rate of interest)
23. • A special form of ownership having a fixed periodic dividend that
must be paid prior to payment of any common stock dividens.
• Hybrid between equity and debt.
• Does not carry voting right
• Entitled to receive dividends before it been issued to other
shareholders.
• If company goes bankrupt, preferred shareholders enjoy property
distribution of company assets.
PREFERRED SHARES
24. VALUATION OF PREFERRED SHARES (VPS)
Vps = Valuation of preferred share
D = Annual dividend
r = Required rate of return
Vps = D
r
25. Find the value of preferred share paying RM 10 dividend
per share, given a required rate of return of the investment
is 20%.
Vps = D/k
= 10/0.20
= RM 50
VALUATION OF PREFERRED SHARES
26. Tesco Corporation issued preferred stock with a stated
dividend of 10 per cent of par. If the rate of return is 8
per cent and par value is RM 100, What is the value of the
preferred stock
Vps =
VALUATION OF PREFERRED SHARES
27. • Also known as ordinary shares
• Issued when corporation needs to raise capital or expand
the business.
• It represents the ownership of the company.
• Common stockholders cannot lose more than they have
invested in the firm.
• Common stockholder will only receive dividends after
every obligation of corporation has been dealt with.
COMMON SHARES
29. • Zero growth
Vcs = Valuation of common stock
D = Dividend
r = required rate of return
VALUATION OF COMMON SHARES
Vcs = D/r
30. • A firm that pays a RM2.50 dividend at the end of every
year to common shareholder. The required rate of return
for this investment is 15%. Calculate the value of this
share.
• Vcs = RM 2.50/0.15
= RM 16.70
VALUATION OF COMMON SHARES
31. • Constant growth
0r
Vcs = Valuation of common stock
D1 = Expected dividend
D0 = Past year dividend
r = Required rate of return
g = growth rate
VALUATION OF COMMON SHARES
Vcs = D1
r - g
Vcs = Do (1 + g)
r - g
32. Takaful Malaysia estimates that the company dividend in
2011 will be RM 1.50 per share. The required rate of
return of the investment is assumed to be 15%. The
historical compound annual growth rate of Takaful
Malaysia’s dividends equal 7%. Calculate the value of the
common shares?
Vcs = RM1.50/(0.15 – 0.07)
= RM 18.75
VALUATION OF COMMON SHARES
33. Great Eastern has paid a dividend of RM6 per share last
year. This dividend is expected to grow at a constant rate
of 6 per cent per year and required rate of return is 11
per cent. Calculate the value of common stock.
Vcs = RM 6 ( 1 + 0.06)
0.11 – 0.06
= RM 127.20
VALUATION OF COMMON SHARES
34. DIFFERENTIAL GROWTH
• Assume that dividends will grow at different
rates in the foreseeable future and then will
grow at a constant rate thereafter.
• To value a Differential Growth Share, we
need to:
• Estimate future dividends in the foreseeable future.
• Estimate the future stock price when the stock becomes a
Constant Growth Stock.
• Compute the total present value of the estimated future
dividends and future stock price at the appropriate discount
rate.
35. DIFFERENTIAL GROWTH
)
(1
Div
Div 1
0
1 g
+
=
• Assume that dividends will grow at rate g1 for N
years and grow at rate g2 thereafter.
2
1
0
1
1
2 )
(1
Div
)
(1
Div
Div g
g +
=
+
=
N
N
N g
g )
(1
Div
)
(1
Div
Div 1
0
1
1 +
=
+
= −
)
(1
)
(1
Div
)
(1
Div
Div 2
1
0
2
1 g
g
g N
N
N +
+
=
+
=
+
.
.
.
.
.
.
36. DIFFERENTIAL GROWTH
)
(1
Div 1
0 g
+
Dividends will grow at rate g1 for N years and grow
at rate g2 thereafter
2
1
0 )
(1
Div g
+
N
g )
(1
Div 1
0 + )
(1
)
(1
Div
)
(1
Div
2
1
0
2
g
g
g
N
N
+
+
=
+
…
0 1 2
…
N N+1
…
37. DIFFERENTIAL GROWTH
We can value this as the sum of:
▪ a T-year annuity growing at rate g1
+
+
−
−
= T
T
A
R
g
g
R
C
P
)
1
(
)
1
(
1 1
1
▪ plus the discounted value of a perpetuity growing at
rate g2 that starts in year T+1
T
B
R
g
R
P
)
1
(
Div
2
1
T
+
−
=
+
38. A common stock just paid a dividend of $2. The
dividend is expected to grow at 8% for 3
years, then it will grow at 4% in perpetuity. The
discount rate is 12%. Calculate value of
common share.
41. A COMMON STOCK JUST PAID A DIVIDEND OF $2. THE
DIVIDEND IS EXPECTED TO GROW AT 8% FOR 3 YEARS,
THEN IT WILL GROW AT 4% IN PERPETUITY. THE DISCOUNT
RATE IS 12%. CALCULATE VALUE OF COMMON SHARE.
n Do (RM) FVIF 8%,n Dt (RM) PVIF12%,n PV (RM)
1 2.00
2
3
total
P2 = x(1+0.04)
(0.12 – 0.04)] x
= RM
Value of Stock = RM + RM
= RM
42. # Betik Bhd recently paid dividend RM2.50 per share and
it is expected to grow at 3 percent per year for the next
5 years, after that the dividend growth rate will increase
to 6 percent at constant rate per year indefinitely.
Assume 10 percent required rate of return. Compute the
value of this common share.
43. BETIK BHD RECENTLY PAID DIVIDEND RM2.50 PER SHARE AND IT IS EXPECTED
TO GROW AT 3 PERCENT PER YEAR FOR THE NEXT 5 YEARS, AFTER THAT
THE DIVIDEND GROWTH RATE WILL INCREASE TO 6 PERCENT AT CONSTANT
RATE PER YEAR INDEFINITELY. ASSUME 10 PERCENT REQUIRED RATE OF
RETURN. COMPUTE THE VALUE OF THIS COMMON SHARE.
n Do (RM) FVIF 5%,n Dt (RM) PVIF10%,n PV (RM)
1 2.50 1.030 2.58 0.909 2.35
2 2.58 1.030 2.65 0.826 2.19
3 2.65 1.030 2.73 0.751 2.05
4 2.73 1.030 2.82 0.683 1.93
5 2.82 1.030 2.90 0.621 1.80
TOTAL 10.32
P2 = [(2.90 (1+0.06) /(0.10 – 0.06)] x [1 / ((1 + 0.10)^5]
= RM 47.66
Value of Stock = RM 47.66 + RM 10.32
= RM 57.98
44. EXERCISE
1.Sake Berhad’s bond have par value of RM1,000. The
bonds pay semiannual coupon interest of RM40 and
mature in five years. Compute the value of bond:
• if required rate of return is 10 percent.
• if required rate of return is 8 percent
45.
46. 2. Tilagam Textiles Bhd wishes to issue new bonds but currently the
market would set the yield to maturity. The bonds would be 20
year maturity, 7 percent coupon bonds with a RM1,000 par
value. Tilagam has determined these bonds would sell for
RM1,050 each. Calculate Yield to Maturity (YTM) for these
bonds.
47. 3.Aviana Berhad wishes to issue a callable bond maturity 20 years
where par value is RM1,100 and market price is RM989.20. The
coupon payment is set at RM100 and interest rate is 10 percent.
Calculate:
I. Yield to Maturity (YTM)
II. Yield to Call (YTC) if call price is RM1,000 and remaining years
is 10years.
48.
49. 4. Jumbo Corporation’s preferred shares are trading for RM25 in
the market and pay a RM4.50 annual dividend. Assume that the
market’s required yield is 14 percent. Compute:
I. The share’s value
II. Decide whether you should purchase the share.
50. 5.Pamela owns 500 common shares of Lex shares. The company
recently issued a statement that it will pay a RM1.00 per share
dividend in 2011 and RM1.30 per share dividend in 2012 and
2013. Her required return on these shares is 12 percent.
Calculate the value of the share each year based zero growth
models.
51.
52. EXERCISE
6. Rizal Berhad has issue preferred stock at RM100 per
share which pays a constant dividend of RM5 per share.
Flotation costs will be RM4 per share and required rate
of return is 10 percent. Calculate the value of preferred
stock.
53. EXERCISE
7. World Berhad is expected to pay a RM0.50 per share
dividend at the end of the year. The dividend is expected
to grow at a constant rate of 7 percent a year. The
required rate of return on the stock is 15 percent. What
is the value per share of the company’s stock?
54.
55. 8. Alamaya Berhad is experiencing a period of rapid growth.
Earnings and dividends are expected to grow at rate of 15
percent during next 2 year and at 13 percent in the third year.
after that the dividend growth rate will maintain to 6 percent at
constant rate per year indefinitely. Alamaya’s last dividend was
RM1.10 and required rate of return on the stock is 12 percent.
Calculate the value of the stock.
Rm24.13
56. • Rahim is considering the following three investment securities:
i. A bond that a selling in the market at RM880. The bond has a
RM1,000 par value, pays coupon interest at 6 percent per annum
(paid semiannually) and is schedules to mature in 10 years. For the
bond of this risk class Rahim believe that that an 8 percent rate of
return should be required. Rm1271.80@Rm864.10
• ii. A preferred share has a RM100 par value that sells for
RM50 and pays an annual dividend of RM4. The required rate of
return is 8 percent. rm50
iii. A common share has a RM30 par value that recently paid a
RM2.50 dividend. The common share’s growth rate at 15 percent
for the first three years, 17.5 percent for the next two years and 10
percent thereafter. The share is currently selling at RM28 and Rahim
think a reasonable required rate of return for the share is 20
percent. Rm34.36
• Based on the information above, calculate the value of bond,
preferred share and common share. (7 marks)