Valuation

Security Valuation
What is valuation?

How do we value assets?

How do we value financial assets?

Sanjeev Bajaj,
Reader, Finance Area

Return Average Return

Total Return = CPR + PC Sum of Returns

Average Return = ----------------------
CPR + PC No. of years
Rate of Return x = ------------------
Purchase Price Σx
X = ------
n
Where CPR = Cash Payments Received
PC = Price Change or
Selling – Purchasing Price

1
 Compounded Average
Example AR
Return (Geometric mean)
Year Price Div. TR ROR (x) G =[(1+x1) (1+x2)…. (1+xn)]1/n – 1
1 10 2 4 40.0%
2 12 2 5 41.67%
3 15 3 8 53.33%
4 20
X = (40 + 41.67 + 53.33)/3 = 45%
Or 0.45

Example CAR Why CAR not AR

Year Price Div. TR ROR (x) Year Price Div. TR ROR (x)
1 10 2 4 40.0% 1 50 0 50 100%
2 12 2 5 41.67% 2 100 0 -50 -50%
3 15 3 8 53.33% 3 50
4 20 AR = (100 – 50)/2 = 25%
G = [(1+.40)(1+.4167)(1+.5333)]1/3-1
G = [(1+1.0)(1-0.5)]1/2-1
= [(1.40)(1.4167)(1.5333)]1/3-1
= [(2)(0.5)]1/2-1 = [1]1/2-1
= [3.04112]1/3-1
= 1– 1
= 1.44875 – 1
= 0%
= 0.4487 or 44.87%

2
Bond Valuation

Coupon Rate

Current Yield

Spot Interest Rate

Yield to Maturity (YTM)

Yield to Call (YTC)

Bond Price

Bond Duration