valoracion instrumentos financieros
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VALORATING FINANCIAL INSTRUMENT
BONDSTOCK
RISK, RATE OF RETURN AND CAPITAL COST
BONDS
Bond – Security that obligates the issuer make specified payments to the bondholder.Coupon – The interest payments paid to the bondholder.Face Value – Payment at the maturity of the bond. Also called par value or maturity value.Coupon Rate – Annual interest payments a percentage of face value.
BOND PRICES AND YIELDSPV = PV(coupons) + PV(face value)= (coupon x annuity factor) + (face value x discount factor).Example: In 1999, Treasury bonds with 3-year maturities offered a return of about 5.6%; face value = $1,000; coupon rate = 6%; coupon = $60.
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PV
RATE OF RETURN
Rate of Return – Total income per period per dollar invested.
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VARIATION IN CORPORATE BONDS
Zero-Coupon Bonds – coupon rate = 0; do not receive a regular coupon payment. These bonds are issued at prices considerably below face value.Floating-Rate Bonds – coupon payments are tied to some measure of current market rates. The rate might be reset once a year to the current Treasury bill rate plus 2 percent.Convertible Bonds – you can choose later to exchange it for a specified number of share of common stock.
STOCK VALORATION
STOCK MARKET
COMMON STOCK
Common stock – Ownership shares in a publicly held corporation.Primary Market – Market for newly-issued securities, sold by the company to raise cash.Initial Public Offering (IPO) – First offering of stock to the general public.Secondary Market – Market in which already-issued securities are traded among investors.
COMMON STOCK
Dividend – Periodic cash distribution from the firm to its shareholders.Price-Earnings (P/E) – Ratio of stock price to earnings per share.Book Value – Net worth of the firm according to the balance sheet.Liquidation Value – Net proceeds that would be realized by selling the firm’s assets and paying off its creditors.
COMMON STOCK VALORATION
Today price =
Tomorrow price =
Expected return =
r
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DIVIDEND DISCOUNT MODEL
With no growth =
If all earning were distributed like dividend, we’ll found
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THE CONSTANT GROWTH DIVIDEND DISCOUNT MODEL
Definition – Version of the dividend discount model in which dividends grow at a constant rate.
Expected Rates of Return = r = dividend yield + growth rate.
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DIVP
1
0
gP
DIVr
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GROWTH STOCKS AND INCOME STOCKS
Payout Ratio – Fraction of earnings paid out as dividends.P/R – g = %DIV + earning per share (E/P).Plowback Ratio – Fraction of earnings retained by the firm.Return=g=returns on equity x plowback ratio
VALUING ENTIRE BUSINESSES
VEB = PV = Capital value/(r-g)Example: Suppose 20,000 common stock outstanding and paid dividend by $2 per share. Investor expect a steady dividend growth of 4% a year and required a return of 9%. So the total value of the firm will be: PV = 40,000/(.09-.04) = $800,000. Also we can get PV = number of shares outstanding x market price of share.
RISK, RETURN, AND CAPITAL COST
RATE OF RETURNMARKET INDEXESMEASURING RISK
RATES OF RETURN
The percentage return on the investment would be:
Example: Supose that you bought stock from GE at the beginning of 2002 at $102 a share. By the end of the year the value of that investment had appreciated to $155 (capital gain = $53). In addition, in 2002 GE paid a dividend of $1.46 per share. The result would be like follow:PR = (CG + Div.)/IPS = (53+1.49)/102 = .534 or 53.4%
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RATES OF RETURN CONT…
Dividend yield = dividend/initial share pricePercentage capital gain = capital gain/initial share price1+real rate of return = (1+nominal rate of return)/(1+inflation rate)
MARKET INDEXES
Market Index – Measure of the investment performance of the overall market.Dow Jones Industrial Average – Index of the investment performance of a portfolio of 30 large industrial stock.Standard & Poor’s Composite Index – Index on the investment performance of a portfolio of 500 large stocks. Also called the S&P 500.
PREMIUM
Maturity Premium – Extra average return from investing in long-term versus short-term Treasury securities.Risk Premium – Expected return in excess of risk-free return as compensation for risk.Rate of Return on Common Stock = Interest rate on Treasury bills + Market risk premium.
MEASURING RISK
Expected return – probability (weighted average of possible outcomes)Variance – Average value of squared deviations from mean. A measure of volatility.Standard Deviation – Square root of variance. Another measure of volatility.
EXAMPLE
Year Rate of Return
Dev. From Ave. Ret.
Squared Dev.
1997 1.31 -23.44 549.43
1998 37.43 12.68 160.78
1999 23.07 -1.68 2.82
2000 33.36 8.61 74.13
2001 28.56 3.83 14.67
Total 135.53 801.84
EXAMPLE CONT….
Variance = 801.84/5 = 160.37Standard Deviation = square root of 160.37 = 12.66%
RISK AND DIVERSIFICATION
Diversification – Strategy designed to reduce risk by spreading the portfolio across many investment.Unique Risk – Risk factors affecting only that firm. Also called diversifiable risk.Market Risk – Economy wide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.
EXAMPLE PORTFOLIO ANALYSISScenario Probability Auto Stock Gold Stock Portfolio
Return%
Recession 1/3 -8% +20% -1%
Normal 1/3 +5% +3% +4.5%
Boom 1/3 +18% -20% +8.5%
Expected Return
5% 1% 4%
Variance 112.7 268.7 15.2
Stand. Dev. 10.6% 16.4% 3.9%
PORTFOLIO RATE OF RETURN
Portfolio rate of return = (Fraction of portfolio in first asset x rate of return on first asset) + (Fraction of portfolio in second asset x rate of return on second asset)For example if the investor diversified the portfolio and invested 75% in autos and 25% in gold, the portfolio return will be: Portfolio return in recession = [.75 x (-8%)] + [.25 x (20%)] = -1%.
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