1 / 13

Concept of Valuation

Concept of Valuation. 3. Bond Returns. a) YTM : Yield To Maturity (Market Interest Rate). Promised Yield to maturity. It is a bond’s IRR. How to calculate IRR :. Cash Flow Annuity. Cash Flow is Perpetuity. Different Cash Flow.

octavius-soto
Télécharger la présentation

Concept of Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Concept of Valuation www.Safeecollege.com

  2. 3. Bond Returns www.Safeecollege.com

  3. a) YTM : Yield To Maturity (Market Interest Rate) Promised Yield to maturity. It is a bond’s IRR. How to calculate IRR : Cash Flow Annuity Cash Flow is Perpetuity Different Cash Flow Similar Cash Flow each period and runs upto a definite period. Use concept of interpolation. Similar Cash Floe each period and runs upto infinity. www.Safeecollege.com

  4. Cash Flow Annuity: Present Value of Inflow = Present Flow of Outflow Cash flow × Cumulative Discount = I Factor for the given period at IRR Step 1: Cumulative Discount Factor (CDF) = I / Cash flow Step 2: Refer annuity table in the given period row and locate interest for the value of CDF and this is the IRR. www.Safeecollege.com

  5. NPV Computed IRR Based on Interpretation Actual IRR As we will decrease the margin we get more accurate IRR Discount Rate B C A Different Cash Flow : IRR = Discount + (Difference Between A to B Factor Two Discount Rates) A to C www.Safeecollege.com

  6. Cash Flow is Perpectual : IRR is a Discount Rate at which NPV = 0 Present Value of Inflow = Present Flow of Outflow Cash flow C = I Return r www.Safeecollege.com

  7. Conventional Cash Flow Case 1: - +++++++++ Investment Cash Flow Case 2: + -------------- Financing Cash Flow IRR fails to distinguish between financing (or borrowing Cash Flow ) and Investment Cash Flow. Non-Conventional Cash Flow -- ++ -- +++ ------- IRR can not be calculated [ This is called Multiple Zero Problem ] www.Safeecollege.com

  8. YTM (Yield to Maturity) It is also known as Market Interest Rate Average Income YTM = Average Investment Or Coupon Amount + ( Maturity Value – Bond Price ) / n YTM = (Bond Price + Maturity Value ) / 2 www.Safeecollege.com

  9. b) CY ( Current Yield) It is an IRR of perpetual bond. In simple words we can say % Earning Per Year. CY = Annual Coupon Amount / Bond Price Interpretation : The CY is used as approximation of YTM of bond having longer maturity period. [ The bond with longer maturity period behaves like a perpetual bond because PV of Capital Gain would be negligible in such case] However for a bond having shorter life the CY & YTM would differ significantly due to Capital Gain. www.Safeecollege.com

  10. c) YTC (Yield to Call) ISSUER [ A bond with CALL feature means the issuer of bond can call it (or pay it) before the maturity date.] For such a bond we can not calculate YTM hence we will calculate YTC. YTC is also an IRR of Bond and computation is similar to YTM with two adjustments. • Replace maturity period with Call Period • Replace maturity value will Call Price. Call Price = Face Value + Call Premium www.Safeecollege.com

  11. d) YTP (Yield to PUT) INVESTOR • It is an IRR of a bond having put feature . • The Put feature allow an investor to get redemption before maturity date. • Unless otherwise given the redemption is at Par Value. • Computation of YTP is similar to YTM with two adjustments: • Replace Maturity Value with Put Value • Replace Maturity Value with Put Period www.Safeecollege.com

  12. e) Realized Yield (RY) Also called total return or Actual Return. Typically Calculated at the end of Bond Period. Concept Point : YTM assumes that all inflows will be reinvested at YTM only. However in practice this may not be possible. Hence Realized Yield tries to calculate return based on Actual Reinvestment Rate on various coupon dates. www.Safeecollege.com

  13. f) Modified YTM This is also IRR of a bond. The need for calculation of modified YTM arises when the investor expects that the inflows (coupon) can be invested at a rate different from YTM. The calculation process is similar to present year. Both would give similar result if revised reinvestment rate turns out to be the actual reinvestment rate. www.Safeecollege.com

More Related