PERTEMUAN KETIGA DAN

KEEMPAT

MANAJEMEN FINANSIAL

NOER AZAM ACHSANI

HENDRO SASONGKO

1
TOPIK BAHASAN

SEKURITAS DAN PENILAIANNYA

2
Valuing Bonds and Stocks

6-3
 Valuing Bonds
A bond is a debt instrument issued by
governments or corporations to raise money

The successful investor must be able to:

• Understand bond structure
• Calculate bond rates of return
• Understand interest rate risk
• Differentiate between real and nominal returns

6-4
 Bond Basics
When governments or companies issue bonds, they promise to
make a series of interest payments and then repay the debt.

 Bond
• Security that obligates the issuer to make specified payments to
the bondholder.
 Face Value
• Payment at the maturity of the bond.
 Coupon
• The interest payments paid to the bondholder.
 Coupon Rate
• Annual interest payment as a percentage of face value.

6-5
 Bond Pricing: Example
Treasury bond prices are quoted in 32nds
rather than in decimals.

Example:
For a $1000 face value bond with a bid price of 103:05 and
an asked price of 103:06, how much would an investor pay
for the bond?

103% + (06/32) = 103.1875% of face value

(1.031875) * ($1,000) = $1,031.875

6-6
 Bond Pricing

coupon coupon (coupon  par )

PV  1
 2
 ....  t
(1  r ) (1  r ) (1  r )

6-7
 Bond Pricing: Example
What is the price of a 9% annual coupon bond with a par
value of $1,000 that matures in 3 years? Assume a required
rate of return of 4%.

6-8
 Bond Pricing
A bond is a package of two investments: an annuity
and a final repayment.

PVBond  PVCoupons  PVParValue

PVBond  coupon  ( Annuity Factor )  par value  ( Discount Factor )
1  (1  r ) t
where Annuity Factor 
r
1
and Discount Factor 
(1  r )t

6-9
 Bond Pricing: Example
What is the value of a 3-year annuity that pays $90 each year and an
additional $1,000 at the date of the final repayment? Assume a
discount rate of 4%.

1  (1  .04) 3 1
PVBond  $90   $1, 000 
.04 (1  .04)3
 $1,138.75

6-10
 Bond Prices & Interest Rates
As interest rates change, so do bond prices.

What is the present value of a 4% coupon bond with face value

$1,000 that matures in 3 years? Assume a discount rate of 5%.
 

What is the present value of this same bond at a discount rate of 2%?
 

6-11
 Bond Yields
To calculate how much we earn on a bond investment,
we can calculate two types of bond yields:

 Current Yield

 Yield to Maturity

6-12
 Current Yield: Example
Suppose you spend $1,150 for a $1,000 face value
bond that pays a $60 annual coupon payment for 3
years.

What is the bond’s current yield?

6-13
 Yield to Maturity
Yield to Maturity:
coupon coupon (coupon  par )
PV    .... 
(1  r )1 (1  r ) 2 (1  r ) t

YTM Approx :
C + (R-P)
n x 100 %
R+P
2
Dimana :
C : kupon
n : periode waktu tersisa (tahun)
R : Redemption Value  nominal
P : Purchase Value
6-14
 Yield to Maturity: Example
Suppose you spend $1,150 for a $1,000 face value bond
that pays a $60 annual coupon payment for 3 years.

What is the bond’s yield to maturity?

$60 $60 ($60  $1,000)

$1,150  1
 2

(1  r ) (1  r ) (1  r ) 3

 
6-15
DARI SISI PENJUAL Rate of Return

 

6-16
 Rate of Return: Example
Suppose you purchase a 5% coupon bond, par value $1,000,
with 5 years until maturity, for $975.00 today. After one year
you sell the bond for $965.00.

What was the rate of return during the period?

6-17
The Yield Curve: Example

6-18
 Interest Rates & Inflation
In the presence of inflation, an investor’s real interest
rate is always less than the nominal interest rate.

6-19
 Interest Rates & Inflation
If you invest in a security that pays 10% interest
annually and inflation is 6%, what is your real
interest rate?

6-20
 Interest Rates & Inflation:
Example
Treasury Inflation Protected Securities (TIPS)

Example:
If you invest in 5% coupon, 3 year TIPS and inflation is 3% each
year, what are your real annual cash flows?
Year 1 2 3
Real cash flows $50 $50 $1,050

6-21
 The Risk of Default
When investing in bonds, there is always the
risk that the issuer may default.

 Default risk

 Default premium

6-22
 The Risk of Default
Bonds come in many categories, with returns
commensurate with risk.
 Credit agency

 Investment-grade bonds

 Junk bonds

6-23
 Types of Corporate Bonds

Zero-Coupon Bonds

Floating-Rate Bonds

Convertible Bonds

6-24
Appendix A: Treasury Bond
Rates

10-year U.S. Treasury bond interest rates, 1900-2010

6-25
Appendix B: Real vs. Nominal Yields

Red line – Real yield on long-term UK indexed bonds

Blue line – Nominal yield on long-term UK bonds
6-26
Appendix C: Credit Ratings

6-27
 Valuing Stocks

This chapters introduces valuations techniques

for equity (stocks).

The Dividend Discount Model provides an

excellent measure of a stock’s intrinsic value.

7-28
 The Stock Market
The two principal stock exchanges in the US are the New York
Stock Exchange & NASDAQ

 Primary Market vs. Secondary Market

 Initial Public Offering

 Primary Offering

7-29
 Primary vs. Secondary Markets:
Example
Shannon sells 100 shares of Google stock from her portfolio for $500
per share to help pay for her son Domenic’s college education.

How much does Google receive from the sale of its shares?

Does this transaction occur on the primary or secondary

market?

7-30
 Bid Price/Ask Price
Bid Price: The prices at which investors are willing to buy
shares.

Ask Price: The prices at which current shareholders are

willing to sell their shares.

Example:
If an investor wishes to purchase 100 shares of Apple with a bid
price of $253.40 and an ask price of $253.48, how much could
the investor expect to pay for the shares?

Answer: $253.48

7-31
 Terminology
Investors use a number of methods to determine the
quality of a company’s shares.
 Market Cap

 P/E Ratio

 Dividend Yield

7-32
 Basic Terminology: Example
You are considering investing in a firm whose shares are currently
selling for $50 per share with 1,000,000 shares outstanding.
Expected dividends are $2/share and earnings are $6/share.

What is the firm’s Market Cap? P/E Ratio? Dividend Yield?

Market Capitalization  $50 1, 000, 000  $50, 000, 000
$50
P/E Ratio   8.33
$6
$2
Dividend Yield   .04  4%
$50
7-33
 Measures of Value
Three ways to value a firm:
Book Value
– Net worth of the firm according to the balance sheet.

Liquidation Value
– Net proceeds that could be realized by selling the firm’s
assets and paying off its creditors.

Market Value
– The value of the firm as determined by investors who would
be willing to purchase the company.
7-34
 Going-Concern Value
The difference between a company’s actual value and its
book or liquidation value is called its going-concern
value.

 Refers to three factors:

1. Extra earning power
2. Intangible assets
3. Value of future investments

7-35
 Price and Intrinsic Value
 

7-36
 Price and Intrinsic Value
Example:
What is the intrinsic value of a share of stock if
expected dividends are $2/share and the expected price
in 1 year is $35/share? Assume a discount rate of 10%.
 

7-37
 Expected Return

7-38
 Expected Return: Example
What should be the price of a stock in one year if it sells for $40
today, has an expected dividend per share of $3, and an expected
return of 12%?

7-39
 The Dividend Discount Model

Div1 Div2 DivH  PH

P0  1
 2
 ...  H
(1  r ) (1  r ) (1  r )
where :
H  Time Horizon
Divi  Dividend in the ith period.
r  Required Rate of Return

7-40
The Dividend Discount Model
Consider three cases:

1. No growth

2. Constant Growth

3. Nonconstant Growth

7-41
 The Dividend Discount Model
 Case 1: No Growth
 

What should the price of a share of stock be if dividends are

projected at $5/share, the discount rate is 10%, and growth is 0%?

7-42
 The Dividend Discount Model
 Case 2: Constant Growth
 

Example: What should the price of a share of stock be if the firm

will pay a $4 dividend in 1 year that is expected to grow at a
constant rate of 5%? Assume a discount rate of 10%.
 

7-43
 The Dividend Discount Model
 Case 3: Nonconstant Growth

Div1 Div2 Div H PH

P0  1
 2
 ...  H
 H
(1  r ) (1  r ) (1  r ) (1  r )

PV of dividends from PV of stock price

year 1 to horizon at horizon

7-44
 Nonconstant Growth Dividend
Discount Model
Example:
A firm is expected to pay $2/share in dividends next year. Those dividends
are expected to grow by 8% for the next three years and 6% thereafter. If
the discount rate is 10%, what is the current price of this security?

7-45
 Required Rates of Return
Estimating Expected Required Rates of Return:
 

Example: What rate of return should an investor expect on a share

of stock with a $2 expected dividend and 8% growth rate that sells
today for $60?

7-46
 Sustainable Growth Rate
If a firm earns a constant return on its equity and plows back a
constant proportion of earnings, then the growth rate g is:
g  Return on Equity  Plowback Rate = ROE  b
earnings  dividends
where : b 
earnings

Example: Suppose a firm that pays out 35% of earnings as dividends and
expects its return on equity to be 10%. What is the expected growth rate?

g  .10  (1  .35)  .065  6.5%

7-47
 Valuing Growth Stocks
Present Value of Growth Opportunities (PVGO) –

Where:
EPS = Earnings per share
PVGO = Present Value of Growth Opportunities

7-48
 Valuing Growth Stocks:
Example
Suppose a stock is selling today for $55/share and there are
10,000,000 shares outstanding. If earnings are projected to be
$20,000,000, how much value are investors assigning to growth per
share? Assume a discount rate of 10%.

7-49
 Methods of Analysis
Investors have many strategies for trying to
beat the market consistently.

 Technical Analysis

 Fundamental Analysis

7-50
 Technical Analysis
Technical analysts try to achieve superior returns by
spotting and exploiting patterns in stock prices.

 Problem with this approach:

 Prices follow a “random walk”

7-51
 Technical Analysis
Returns on NYCI on two successive weeks, 1970-2010

Are successive security prices related?.

7-52
 Fundamental Analysis
Fundamental analysts are paid to uncover stocks
for which price does not equal intrinsic value.

What happens in a market with many talented

and competitive fundamental analysts?

7-53
 Efficient Market Hypotheses
Is the US stock market a highly efficient market?

Degrees of efficiency:
• Weak-form Efficiency

• Semistrong-form Efficiency

• Strong-form Efficiency

7-54
 Market Anomalies
There are a number of market anomalies that seem to puzzle
efficient market theorists, including:

The Earnings Announcement Puzzle

The New-Issue Puzzle

Bubbles

7-55
 Behavioral Finance
Some believe that deviations in prices from intrinsic
value can be explained by behavioral psychology, in
two broad areas:
1. Attitudes toward risk--People generally dislike incurring
losses, yet they are more apt to take bigger risks if they are
experiencing a period of substantial gains.

2. Beliefs about probabilities--Individuals commonly look

back to what has happened in recent periods and assume this is

representative of future outcomes. 7-56