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Finance

FNCE 2P91

Clarke Melville

Winter

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FNCE 2P91 - Section 05
Winter 2011 - Duration 03
15.02.11
FNCE 2P91: Corporate Finance-Notes-Chapter 8: Stock Valuation
Notes
Saturday, February 19
Quiz Two Bonds and Stocks Chapters 7 and 8
Lab 5 Stocks Chapter 8
Midterm
March 5 Saturday
Up to and including today’s class
Next Week
Reading Week
st
March 1
Two weeks from today
Chapter 9 not on the midterm
Review
BOOSTER JUICE EXAMPLE
Instead of spending $7.29 per week on Booster Juice, an aspiring 2P91 student invests that money at an
EAR of 8% every week for 4 years from age 18 to 22. Then he/she lets the savings compound until
retirement at age 65. How much does the student have at age 65?
EAR 6%
EWR ?
Step One:
How much have they saved at age 22?
$7.29 annuity
[ ]
Step Two:
Let the FV22grow at the EAR of 6% for 43 years FNCE 2P91 - Section 05
Winter 2011 - Duration 03
REVIEW QUESTION
Find the N value of an annuity formula
You owe $5000 and have agreed to make $150 payments per month to lender. If the APR you are being
charged is 6%, how many payments will you have to make?
PV $5000
Payment $150
r
N ?
[ ]
REVIEW QUESTIONS FROM TEXT FOR MIDTERM
Chapter 7 Chapter 8 Chapter 6
7-3 8-9 6-11
7-4 8-10 6-13
7-14 8-11 6-14
7-16 8-13 6-29
7-24 8-19 6-33
7-26 8-20 6-39
7-30 6-59
6-69
BOND REVIEW
Price of any Bond is going to be equal to the Present Value of Cash Flows
For Example:
We had a bond with 12% coupon rate and 30 years to maturity with a YTM of 12%. The face value is
$1000. What is the price of the bond going to be?
[ ]
If YTM increases to 15%
[ ]
Interest Rate Risk
Longer bonds will have more price movement that shorter bonds for same YTM impact FNCE 2P91 - Section 05
Winter 2011 - Duration 03
Example Two
Compare above 30 year bond to 2 year bond
Coupon Rate 12%
Maturity 2 years
YTM 12%
Face Value $1000
Price = $1000
Part Two:
Question:
If YTM increase to 15%
Answer:
HOLDING PERIOD YIELD
Try question 7-30 in the textbook
Question:
You just bought a 20 year bond with a 6% coupon rate for $894.06. Face value is $1000. What is the
YTM?
Answer:
Option One:
YTM will be less than 6%. Therefore bond is selling at discount.
[ ]
Solve for YTM
Option Two:
Estimate YTM
[ ]
̂
[ ]
̂
Check:
At 7% YTM
[ ]
Therefore, YTM is 7% FNCE 2P91 - Section 05
Winter 2011 - Duration 03
Part Two:
Question:
Inflation has been creeping up over 5 years so that in 5 years the bonds YTM is now 9%. What is the
price now?
Answer:
[ ]
Part Three:
Question:
Boss tells you we need the money, sell it! What is the Holding Period Yield?
Answer:
[ ]
Solve for HPY Trial and Error
Try 5%
So 5% is too high
Try at 3.90%
So HPY is 3.90%
Try question 7-30 for Holding Period Yield
If you have the 6 edition it is 7-27
CHAPTER 8: STOCK VALUATION
Formula:
How do investors get paid?
Bonds
Coupons
Face Value/Principle Repaid
o Cash Flows are KNOWN
o Length in years of terms
Stocks
Dividends
Perpetual Cash Flow

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