Financial Markets - Money market-Organized and Unorganized-Sub markets
Capital market- Primary market-IPO-FPO- NFO, Book Building-Right Issue-Private placement- Bonus issue-Buyback
Secondary Market-Stock exchanges- Role and functions of Stock Exchanges- BSE-NSE.
Regulatory authorities and their functions – RBI, SEBI
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Financial Markets - Money market-Organized and Unorganized-Sub markets
Capital market- Primary market-IPO-FPO- NFO, Book Building-Right Issue-Private placement- Bonus issue-Buyback
Secondary Market-Stock exchanges- Role and functions of Stock Exchanges- BSE-NSE.
Regulatory authorities and their functions – RBI, SEBI
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Fixed Income Securities Yield Measures.pptxanurag202001
Sources of Return
Yield Measures for Fixed-Rate Bonds
Yield to Call
Yield to Put
Yield to Worst
Cash Flow Yield
Yield Measures for Floating Rate Notes
Yield Measures for Money Market Instruments
Theoretical Spot rates (Bootstrapping)
Derivation of Forward Rates
Yield Spreads
Riding the Yield Curve
1Valuation ConceptsThe valuation of a financial asset is b.docxeugeniadean34240
1
Valuation Concepts
The valuation of a financial asset is based on determining the present value of future cash flows. Thus we need to know the value of future cash flows and the discount rate to be applied to the future cash flows to determine the current value.
The market-determined required rate of return, which is the discount rate, depends on the market’s perceived level of risk associated with the individual security. Also important is the idea that required rates of return are competitively determined among the many companies seeking financial capital. For example ExxonMobil, due to its low financial risk, relatively high return, and strong market position, is likely to raise debt capital at a significantly lower cost than can United Airlines, a financially troubled firm. This implies that investors are willing to accept low return for low risk, and vice versa. The market allocates capital to companies based on risk, efficiency, and expected returns—which are based to a large degree on past performance. The reward to the financial manager for efficient use of capital in the past is a lower required return for investors than that of competing companies that did not manage their financial resources as well.
Throughout this course, we apply concepts of valuation to corporate bonds, preferred stock, and common stock. For that purpose we have to be aware of the basic characteristics of each form of security as part of the valuation process. We have to consider the following:
· The valuation of a financial asset is based on the present value of future cash flows.
· The required rate of return in valuing an asset is based on the risk involved.
· Bond valuation is based on the process of determining the present value of interest payments plus the present value of the principal payment at maturity.
· Preferred stock valuation is based on the dividend paid.
· Stock valuation is based on determining the present value of the future benefits of equity ownership.
List of terms:
required rate of return
That rate of return that investors demand from an investment to compensate them for the amount of risk involved.
yield to maturity
The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
real rate of return
The rate of return that an investor demands for giving up the current use of his or her funds on a noninflation-adjusted basis. It is payment for forgoing current consumption. Historically, the real rate of return demanded by investors has been of the magnitude of 2 to 3 percent.
inflation premium
A premium to compensate the investor for the eroding effect of inflation on the value of the dollar.
risk-free rate of return
Rate of return on an asset that carries no risk. U.S. Treasury bills are often used to represent this measure, although longer-term government securities have al.
Personal Selling and Salesmanship. this slideshow deals with the selling process which include prospecting and qualifying, pre-approach, approach, presentation and demonstration,handling of objections, sales close, after sales services.
UNIT- III SALES FORCEMANAGMENT FOR B.COM CBCS, PERSONAL SELLING AND SALESMANSHIPDr. Toran Lal Verma
UNIT- III SALES FORCE MANAGEMENT FOR B.COM CBCS, PERSONAL SELLING AND SALESMANSHIP. This slideshow deals with the recruitment of salesman, selection of salesman, the selection process, the process of recruitment, methods of recruitment, internal and external sources of recruitment types of interviews, the difference between recruitment and selection.
UNIT V SALES REPORTS AND ETHICS IN PERSONAL SELLING FOR CBCS BCOM PERSONAL ...Dr. Toran Lal Verma
UNIT V SALES REPORTS AND ETHICS IN PERSONAL SELLING FOR CBCS BCOM PERSONAL SELLING AND SALESMANSHIP. This slideshow deals with the meaning of sales report, types of sales reports, importance of sales report, meaning of sales manual, essentials of sales manual, contents of sales manual, What is a tour diary, what is cash memo, what is an order book, what are the ethics in personal selling etc.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
Students, digital devices and success - Andreas Schleicher - 27 May 2024..pptxEduSkills OECD
Andreas Schleicher presents at the OECD webinar ‘Digital devices in schools: detrimental distraction or secret to success?’ on 27 May 2024. The presentation was based on findings from PISA 2022 results and the webinar helped launch the PISA in Focus ‘Managing screen time: How to protect and equip students against distraction’ https://www.oecd-ilibrary.org/education/managing-screen-time_7c225af4-en and the OECD Education Policy Perspective ‘Students, digital devices and success’ can be found here - https://oe.cd/il/5yV
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
Ethnobotany and Ethnopharmacology:
Ethnobotany in herbal drug evaluation,
Impact of Ethnobotany in traditional medicine,
New development in herbals,
Bio-prospecting tools for drug discovery,
Role of Ethnopharmacology in drug evaluation,
Reverse Pharmacology.
How to Create Map Views in the Odoo 17 ERPCeline George
The map views are useful for providing a geographical representation of data. They allow users to visualize and analyze the data in a more intuitive manner.
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
2. VALUATION
• Valuation is the process of determining the worth of an asset at zero
period of time.
• Securities here include Equity share, Preference share and
Bond/Debenture.
• Value of security is closely related to the present value of the future
cash streams. Called as Intrinsic Value.
• The Value realized at the end of maturity of the security is Terminal
Value.
• Different Assets may be valued differently with different perspective.
3. Securities/Assets could be valued on the basis of following
1. Book Value: It is an accounting concept. It is the difference between
book value of total asset and book value of total External liability.
Also known as net worth/Shareholders fund.
2. Market Value: The current price at which the security can be sold is
market price.
3. Going Concern Value: The amount a business concern could
realize if the business is sold as an operating unit is known as going
concern value. Going Concern Value depends upon the ability to
generate sales and profits in the future.
4. Liquidating Value: The amount which the owners would realize
after having liquidated the business it firms liquidation value. It may
also be zero.
5. Replacement Value: It is the amount which is required to replace
the existing assets.
4. 6. Capitalized Value: The Capitalized value of a financial asset is the
sum of present value of cash flows from an asset. It is also known as
Economic Value.
• It is the most relevant concept of valuation of securities.
• We are going to discuss this concept only.
5. VALUATION OF BOND/DEBENTURES
Debentures are issued by corporates.
Bonds are Mainly issue by government and quasi government agencies.
It carries fixed interest rate i.e. Coupon rate.
The Present Value of Bond
P.V. =
𝐶
(1+𝑟) 𝑡 +
𝑇𝑉
(1+𝑟) 𝑛
P.V. = Present Value
C = Coupon or interest for the time ‘t’
T.V. = Terminal Value repayable at maturity (at par, premium or discount)
r = Internal rate of return or cost of capital
n = number of years to maturity
6. An investor purchases a bond whose face value is 1000, maturity period is
5 years and coupon rate is 7%. The required rate of return is 8%. What
amount he should be willing to pay now to purchase the bond if it matures
at par.
7. An investor purchases a bond whose face value is 1000, maturity period is 5
years and coupon rate is 7%. The required rate of return is 8%. What amount
he should be willing to pay now to purchase the bond if it matures at par.
Solution
P.V. =
𝑪𝟏
(𝟏+𝒓) 𝟏 +
𝑪𝟐
(𝟏+𝒓) 𝟐 +
𝑪𝟑
(𝟏+𝒓) 𝟑 +
𝑪𝟒
(𝟏+𝒓) 𝟒 +
𝑪𝟓
(𝟏+𝒓) 𝟓 +
𝑻𝑽
(𝟏+𝒓) 𝟓
P.V. =
𝟕𝟎
(𝟏+.𝟎𝟖) 𝟏 +
𝟕𝟎
(𝟏+.𝟎𝟖) 𝟐 +
𝟕𝟎
(𝟏+.𝟎𝟖) 𝟑 +
𝟕𝟎
(𝟏+.𝟎𝟖) 𝟒 +
𝟕𝟎
(𝟏+.𝟎𝟖) 𝟓 +
𝟏𝟎𝟎𝟎
(𝟏+.𝟎𝟖) 𝟓
P.V. = 64.81 + 60.01 + 55.57 + 51.45 + 47. 64 + 680.58
P.V. = 960.06
8. If half yearly calculation is to be done
• Number of years must be multiplied with 2
• Coupon payment must be divided by 2
• Coupon rate must be divided by two
Coupon = 70/2 =35
r = 0.8/2 = 0.4
N = 10 years
=
𝟑𝟓
(𝟏+.𝟎.𝟒) 𝟏 +
𝟑𝟓
(𝟏+.𝟎.𝟒) 𝟐 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟑 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟒 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟓 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟔 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟕 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟖
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟗 +
𝟑𝟓
(𝟏+.𝟎𝟒) 𝟏𝟎 + +
𝟏𝟎𝟎𝟎
(𝟏+.𝟎𝟒) 𝟏𝟎
9. VALUATION OF ZERO COUPON BOND
• The debt instrument which do not pay any interest. But issue at
discount and redeemed at par. So the present value of redemption
amount/terminal amount will be the value of zero coupon bond.
P.V. =
𝑇𝑉
(1+𝑟) 𝑛
10. YIELD TO MATURITY
• The yield to maturity, book yield or redemption yield is rate of
return earned by an investor who purchases bonds and holds it till
maturity.
• Yield to maturity is the discount rate at which the sum of all future
cash flows from the bond (coupons and principal) is equal to the
current price of the bond.
• Same as internal rate of return.
11. Valuation of Preference
1. Value of Redeemable preference share is determined same as Bonds.
P.V. =
𝑷𝒅𝟏
(𝟏+𝒓) 𝟏 +
𝑷𝒅𝟐
(𝟏+𝒓) 𝟐 +
𝑷𝒅𝟑
(𝟏+𝒓) 𝟑 +
𝑷𝒅𝟒
(𝟏+𝒓) 𝟒 +
𝑷𝒅𝟓
(𝟏+𝒓) 𝟓 +
𝑻𝑽
(𝟏+𝒓) 𝟓
2. Value of Irredeemable preference share is determined by the
following formula:
Po =
𝑃𝑑
𝑘𝑝
12. VALUATION OF EQUITY
• On the basis of Accounting information
• On the basis of Dividend
• On the basis of Earnings
13. VALUATION OF EQUITY ON THE BASIS OF ACCOUNTING INFORMATION
1. Book Value Approach: it is simply the firms net worth divided by
Number of equity shares.
Net Worth = Equity share capital+ reserves and surplus-
accumulated losses
Net Worth = Total asset – Total External Liabilities
Book Value of Equity =
net worth
𝑵𝒖𝒎𝒃𝒓 𝒐𝒇 𝑬𝒒𝒖𝒊𝒕𝒚 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔
14. 2. Liquidation Value Approach: The liquidation value of an equity share is
the amount of cash that would be received from the company if all its assets
are sold and all its liabilities are paid.
liquidation value =
𝑉𝑎𝑙𝑢𝑒 𝑟𝑒𝑎𝑙𝑖𝑠𝑒𝑑 𝑓𝑟𝑜𝑚 𝑎𝑠𝑠𝑒𝑡𝑠−𝑎𝑚𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑏𝑙𝑒 𝑡𝑜 𝑎𝑙𝑙 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟
15. VALUATION OF EQUITY ON THE BASIS OF DIVIDEND
1. Single Period Valuation Model: When equity share is held by
investor for just one year.
Po =
𝑫𝟏
(𝟏+𝒓) 𝟏 +
𝑷𝟏
(𝟏+𝒓) 𝟏
16. Problem: Bright Limited is expected to declare a dividend of Rs. 5 and
reach a price of Rs. 70 a year. What is the price at which the equity
share would be sold to the investors now if the required rate of return is
14%.
Solution:
Po =
𝑫𝟏
(𝟏+𝒓) 𝟏 +
𝑷𝟏
(𝟏+𝒓) 𝟏
Po =
𝟓
(𝟏+.𝟏𝟒) 𝟏 +
𝟕𝟎
(𝟏+𝟎𝟏𝟒) 𝟏
Po =
𝟓
𝟏.𝟏𝟒
+
𝟕𝟎
𝟏.𝟏𝟒
Po = 𝟒. 𝟑𝟗 + 𝟔𝟏. 𝟒𝟏
Po = 65.80
17. Multiperiod Dividend Valuation Model
When an investor holds an equity shares for n number of year, the value
of share is the present value of all future stream of dividends.
P0 =
𝑫
(𝟏+𝒓) 𝟏 +
𝑫
(𝟏+𝒓) 𝟐 +
𝑫
(𝟏+𝒓) 𝟑 +
𝑫
(𝟏+𝒓) 𝟒 +
𝑫
(𝟏+𝒓) 𝟓 …………….
18. ON THE BASIS OF GROWTH OF DIVIDEND
1. Zero growth in dividend or constant dividend
Po =
𝐷
𝑘𝑒
2. Constant growth in dividend
Po =
𝐷
𝑘𝑒−𝑔
19. Suppose a firm pays a dividend of 20% on the equity shares of face
value of rs. 100 each. the required rate of return of the investor is 15%.
Find out the value of equity shares given that
1. the dividend rate is expected to remain same and
2. the dividend rate is expected to grow constantly at 3%
Solution
Po =
𝐷
𝑘𝑒
×100
Po =
20
15
×100
Po = 133.33
Po =
𝐷
𝑘𝑒−𝑔
×100
Po =
20
15−.03
×100
Po = 133.60
20. VALUATION OF SHARES ON THE BASIS OF EARNINGS
1. Walter Model
2. Gordon Model
3. P/E Ratio
21. P/E RATIO
P/E Ratio =
𝑀𝑃𝑆
𝐸𝑃𝑆
EPS =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑓𝑜𝑟 𝑒𝑞𝑢𝑖𝑡𝑦𝑠 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
Value of equity Share = EPS× P/E Ratio
23. Capital Asset Pricing Model
• The capital asset pricing model (was developed in 1952 by Harry
Markowitz.
• It was later adapted by other economists and investors, including William
Sharpe, Merton miller, Jack Treynor, John Lintner.
• Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Prize
in Economics for this contribution to the field of financial economics
• CAPM describes the relationship between an investor’s risk and
the expected return. It is designed to help model the pricing of higher-risk
securities.
• In other words, we can say that it is expected rate of return on high risk
securities
• According to the CAPM theory, the expected return of a particular security
or a portfolio is equal to the rate on a risk-free security plus a risk premium.
24. ASSUMPTIONS OF CAPM
1. The market is perfect: there are no taxes, there are no transaction
costs, securities can be bought and sold freely and easily,
information is available freely and easily.
2. The investors are risk averse i.e. they try to avoid risk.
3. Investors have homogenous expectations of returns.
4. Investors can borrow and lend freely at the riskless rate of interest.
5. All investors aim to maximize economic value.
25. FARMULA: THE BRAHMASTRA
Ki = Rf + β(Rm –Rf )
Where,
Ki = the required return on security
Rf = Risk free rate of return
β = The beta (Risk) of the security
Rm = Market rate of return
Rm–Rf = Risk Premium
The Capital Asset Pricing Model (CAPM) is a model that describes the
relationship between expected return and risk of investing in a security. It
shows that the expected return on a security is equal to the risk-free return
plus a risk premium, which is based on the beta of that security.
26. Overall stock market has a beta of 1.0
1. β > 1 =high volatility, high risk, aggressive security
2. β < 1 = Low volatility, low risk, defensive security
3. β = 1 = same volatility as the market .
27. The current interest rate on Indore municipal bond is 3%. And the NSE
Nifty is expected to bring in returns of 9% over the next year. Mr. Aman
kanojia wants to purchase shares of RIL and he has learned that the beta
of RIL is 1.9. What rate of return should Mr. Kanojia expect from the
shares of RIL.