FIN 509 Class Web Page, Summer' 24
The Syllabus Grade
Calculator Overall
Grade Calculator Risk Tolerance Test (FYI)
Weekly SCHEDULE, LINKS, FILES and Questions
Week 
Coverage, HW, Supplements 
Required 
Equations and
Assignments 

·
Weekly Thursday class url on blackboard
collaborate: On Blackboard under “Join Course Room” ·
Weekly
Q&A Session on Blackboard URL: https://us.bbcollab.com/guest/04f276d959734ce49e45fcfd73d6b947 Class Schedule:



Week 0 
Market
Watch Game Use the information and directions
below to join the game. 1.
URL for
your game: 2. Password for this private game: havefun 3. Click on the 'Join Now' button to get
started. 4. If you are an existing MarketWatch member, login. If you are a new user,
follow the link for a Free account  it's
easy! 5. Follow the instructions and start trading! FYI How To Win The MarketWatch
Stock Market Game (youtube) based on https://www.finviz.com

Preclass assignment: Set up marketwatch.com account and have
fun 

Week1,2 
Chapter 5 Time value of money – Part
1 Chapter 5 In Class Exercise (Solution Word File)
The time value of money 
German Nande (youtube)
Concept of FV, PV,
Rate, Nper Calculation of FV, PV,
Rate, Nper Concept of interest
rate, compounding rate, discount rate In class exercise
(conceptual) 1.
What is the time value of money? a) The value of money decreases
over time. b) The concept that money available today is worth more than the
same amount in the future. c) The value of money remains
constant regardless of time. Answer: B Explanation:
The time value of money states that money available today is worth more than
the same amount in the future due to its potential earning capacity. 2.
Which
factor connects the present value of money to its future value? a) The interest rate b) The inflation rate c) The exchange rate Answer: A Explanation:
The interest rate, also known as the discount rate, connects the present
value of money to its future value through the process of compounding. 3.
What
does the future value of money represent? a) The value of money in the past b) The value of money at present c) The value of money in the future Answer: C Explanation:
The future value of money represents the value of a sum of money at a future
point in time, considering the effects of compounding. 4.
How
does compounding affect the future value of money? a) It decreases the future value. b) It has no effect on the future
value. c) It increases the future value. Answer: C Explanation:
Compounding refers to the process where the future value of an investment
grows exponentially over time due to the accumulation of interest. 5.
Which
equation represents the future value of a single sum of money? a) FV = PV / (1 + r)^n b) FV = PV * (1 + r)^n c) FV = PV  (1 + r)^n Answer: B Explanation:
The formula FV = PV * (1 + r)^n calculates the future value (FV) of a present
sum of money (PV) compounded over 'n' periods at an interest rate (r). 6.
How
does increasing the number of compounding periods per year affect the future
value of money? a) It decreases the future value. b) It has no effect on the future
value. c) It increases the future value. Answer: C Explanation:
Increasing the number of compounding periods per year results in more
frequent interest accrual, leading to a higher future value of money. 7.
What
role does the period play in calculating the future value of money? a) It determines the interest
rate. b) It indicates the present value. c) It represents the number of
years or compounding periods. Answer: C Explanation:
The period refers to the number of years or compounding periods over which
the future value of money is calculated. Chapter 6 Time Value of Money – Part
2 Chapter 6 In Class Exercise (Chapter 6 In Class Exercise
Solution Word File) Concept of PMT, NPV Calculation of FV, PV,
Rate, Nper, PMT, NPV, NFV Concept of EAR, APR Calculation of EAR,
APR First Discussion Board Assignment (post your writing on blackboard
under discussion folder):
Market Watch Game
Let's start trading in the stock
market! Please join a game and report back on your experience. Directions 1.
URL for your game: 2.
Password for this private game: havefun. 3.
Click on the Join Now button to get
started. 4.
Register for a new account with your email address or sign in if
you already have an account.
1.
Why did you choose the stock? How much money did you think you
would make? Please explain. 2.
Did you make money or lose money off of your chosen stock? Which
factors contributed to that? 3.
What did you learn from this experience and how will it affect
your choices in real life when choosing stocks? Instructions ·
Responses should be 100 to 250 words in length and should answer
all three prompts ·
Optional: reply to one of your peers with meaningful, thoughtprovoking
responses ·
Due by 7/11/2024 at
11:59 p.m. ET HOMEWORK of Chapters 5
and 6 (due by 7/11 ) 1. The Thailand
Co. is considering the purchase of some new equipment. The quote consists of a
quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the
purchase price of the equipment? ($138,617.88) 2. The
condominium at the beach that you want to buy costs $249,500. You plan to
make a cash down payment of 20 percent and finance the balance over 10 years
at 6.75 percent. What will be the amount of your monthly mortgage
payment? ($2,291.89) 4. Shannon wants
to have $10,000 in an investment account three years from now. The account
will pay 0.4 percent interest per month. If Shannon saves money every month,
starting one month from now, how much will she have to save each month?
($258.81)
(Hint: Bridget’s is an annuity due, so abs(fv(8%/12, 10*12, 150, 0,
1))  type =1; Jordan’s is an ordinary annuity, so abs(fv(8%/12, 10*12, 175, 0)  type =0, or omitted. There is a
mistake in the help video for this question. Sorry for the mistake.) 14. What is the
future value of weekly payments of $25 for six years at 10 percent? ($10,673.90) 15. At the end of
this month, Bryan will start saving $80 a month for retirement through his
company's retirement plan. His employer will contribute an additional $.25
for every $1.00 that Bryan saves. If he is employed by this firm for 25 more
years and earns an average of 11 percent on his retirement savings, how much
will Bryan have in his retirement account 25 years from
now? ($157,613.33) 16. Sky
Investments offers an annuity due with semiannual payments for 10 years at 7
percent interest. The annuity costs $90,000 today. What is the amount of each
annuity payment? ($6,118.35) 17. Mr. Jones
just won a lottery prize that will pay him $5,000 a year for thirty years. He
will receive the first payment today. If Mr. Jones can earn 5.5 percent on
his money, what are his winnings worth to him
today? ($76,665.51) 18. You want to
save $75 a month for the next 15 years and hope to earn an average rate of
return of 14 percent. How much more will you have at the end of the 15 years
if you invest your money at the beginning of each month rather than the end
of each month? ($530.06) 19. What is the
effective annual rate of 10.5 percent compounded
semiannually? (10.78%) 22. What is the
effective annual rate of 12.75 percent compounded daily? (13.60 percent) 23. Your
grandparents loaned you money at 0.5 percent interest per month. The APR on
this loan is _____ percent and the EAR is _____ percent. (6.00; 6.17) FYI only: help for homework Part 1(Qs
12) Part 2(Qs
48) Part 3(Qs 912) Part 4(Qs
1316) Part 5(Qs
1720) Part 6(Qs 2124) (Q13: Bridget’s is an annuity
due, so abs(fv(8%/12, 10*12, 150, 0, 1))  type =1; Jordan’s is an ordinary
annuity, so abs(fv(8%/12, 10*12, 175, 0)  type =0, or omitted. There is a mistake in the help video
for this question. Sorry for the mistake.) Quiz 1 Help Videos  Practice
Quiz 
Calculators Time
Value of Money Calculator © 2002  2019 by Mark A. Lane,
Ph.D. Math Formula FV = PV *(1+r)^n PV = FV /
((1+r)^n) N
= ln(FV/PV) / ln(1+r) Rate = (FV/PV)^{1/n} 1 Annuity: N
= ln(FV/C*r+1)/(ln(1+r)) Or N
= ln(1/(1(PV/C)*r)))/ (ln(1+r)) EAR = (1+APR/m)^m1 APR = (1+EAR)^(1/m)*m Excel Formulas To get FV, use FV
function. =abs(fv(rate, nper,
pmt, pv)) To get PV, use PV
function =
abs(pv(rate, nper, pmt, fv)) To get r, use rate
function =
rate(nper, pmt, pv, fv) To get number of
years,
use nper function = nper(rate, pmt, pv,
fv) To get annuity
payment, use PMT
function = abs(pmt(rate, nper, pv,
fv)) To get Effective
rate (EAR), use Effect
function =
effect(nominal_rate, npery) To get annual
percentage rate (APR), use nominal
function APR = nominal(effective rate, npery) To get NPV, use NPV function NPV = npv(rate, cf1, cf2,…) + cf0 

Week3 
Chapter 7 Bond
Pricing Part I  Yield Curve https://finramarkets.morningstar.com/MarketData/Default.jsp?sdkVersion=2.62.9 Or at https://www.gurufocus.com/yield_curve.php In Class Exercise based on the yield curve of 7/3/2024
(FYI only) 1.
Why does the 1month yield exceed the 10year
yield? a) Longterm
bonds are inherently riskier, leading to higher yields. b) Investors
prefer shortterm investments due to greater liquidity. c) Central bank
policies exert stronger influence on shortterm interest rates. Answer: c Explanation:
Central banks often adjust shortterm interest rates to manage economic
conditions and inflation. Therefore, changes in shortterm yields are more
responsive to central bank actions compared to longterm yields, resulting in
the 1month yield exceeding the 10year yield. 2.
2. Why might the 30year yield be lower than the
1year yield? a) Investors expect lower inflation rates over the
next 30 years compared to the next year. b) Longterm bonds are perceived as safer
investments, leading to lower yields. c) Central bank policies are more accommodative to
longterm borrowing. Answer: a Explanation:
The yield curve can invert when investors anticipate lower inflation rates
over the long term. In such cases, they may demand lower yields for longterm
bonds like the 30year yield compared to shortterm bonds like the 1year
yield. This inversion can signal expectations of economic slowdown or
recession. 3.
Which factor could contribute to the 2year yield
being lower than the 1month yield? a) Market
anticipation of future interest rate hikes in the short term. b) Central bank
interventions favor longterm borrowing. c) Longterm
bonds offer higher yields to compensate for risks. Answer: a Explanation:
If the market anticipates interest rate hikes in the near future, shortterm
yields may rise, causing the 1month yield to exceed the 2year yield. 4.
Why might the 30year yield be higher than the
10year yield? a) Investors
anticipate higher inflation rates over the next 30 years. b) Longterm
bonds are perceived as riskier investments, leading to lower yields. c) Longterm
bonds are subject to increased uncertainty and volatility, resulting in
higher yields. Answer: c Explanation:
Longterm bonds, such as the 30year yield, are exposed to greater
uncertainty and volatility over an extended period compared to shorterterm
bonds like the 10year yield. This heightened risk and uncertainty lead
investors to demand higher yields as compensation, resulting in the 30year
yield being higher than the 10year yield. 5.
Why might the 2year yield be higher than the
30year yield? a) Investors
anticipate higher shortterm inflation rates compared to longterm inflation
rates. b) Investors
demand more longterm bonds due to higher economic risk. c) Longterm
bonds are perceived as safer investments, leading to lower yields. Answer: b Explanation:
The 2year yield might exceed the 30year yield because investors seek the
relative safety of longerterm investments amid higher economic risk. During
periods of economic uncertainty or volatility, investors may prefer longterm
bonds as a hedge against shortterm market fluctuations. This increased
demand for longterm bonds can drive up the price of the 30year bonds, and
drive down their yields, causing the 30year yield to be lower than the
2year yield. The yield curve is inverted! 6.
Why might the 1month yield be more influenced by
changes in central bank policies than the 2year yield? Options: a) Shortterm bonds
are directly impacted by adjustments in key interest rates set by central
banks. b) Longterm
bonds are less responsive to economic indicators. c) Investors
prefer shortterm investments due to higher liquidity. Answer: a Explanation:
Shortterm yields are directly affected by changes in key interest rates set
by central banks, making them more responsive to central bank policies
compared to longerterm yields. 7.
Why might an inverted yield curve occur, where
shortterm yields are higher than longterm yields? a) Investors
anticipate higher shortterm inflation rates compared to longterm inflation
rates. b) Investors
demand more longterm bonds due to higher economic risk. c) Longterm
bonds are perceived as safer investments, leading to lower yields. Answer: b Explanation:
An inverted yield curve, where shortterm yields exceed longterm yields, can
occur when investors seek the relative safety of longerterm investments amid
higher economic risk. During periods of economic uncertainty or volatility, investors
may prefer longterm bonds as a hedge against shortterm market fluctuations,
leading to increased demand and lower yields for longterm bonds. This
phenomenon results in an inverted yield curve, which is often interpreted as
a signal of impending economic downturn or recession. 8.
What typically characterizes a normal yield curve? a) Shortterm
yields are higher than longterm yields. b) Longterm
yields are higher than shortterm yields. c) Shortterm
and longterm yields are approximately equal. Answer: b Explanation:
In a normal yield curve, longterm yields are typically higher than
shortterm yields. This upwardsloping curve reflects the expectation of
higher returns for investors who commit their funds for longer periods,
compensating for the additional risk and uncertainty associated with longer
maturities. This pattern is commonly observed in healthy economic
environments where investors anticipate future growth and inflation, leading
to higher longterm interest rates. 9.
What does an inverted yield curve, where
shortterm yields exceed longterm yields, typically signal for the economy? a) Accelerated
economic growth and expansion. b) Stable
economic conditions with minimal fluctuations. c) Potential
onset of a recession. Answer: c Explanation:
An inverted yield curve, where shortterm yields exceed longterm yields,
often signals the potential onset of a recession. This phenomenon occurs when
investors anticipate lower future growth and inflation, leading to increased
demand for longerterm bonds and driving down their yields. Historically,
inverted yield curves have been reliable predictors of economic downturns, as
they reflect market expectations of weaker economic performance in the
future. As a result, policymakers and investors closely monitor yield curve
inversions as a potential warning sign of impending economic contraction.
Inverted yield curves have been observed before many prior recessions,
including those in the early
1980s, early 1990s, early 2000s, and the most recent one in 2008. Part II – Bond Definition How
Bonds Work (video) For
discussion: https://jufinance.com/risk_tolerance.html
· Among the aforementioned bonds, do you
have a preference? If so, what factors influence your choice? Outlook for Investing in Bonds in
2024 After starting the year recommending that investors focus on
the middle of the yield curve, we began to advise investors to lengthen their
duration in our midyear bond
market update. According to our forecasts, we continue to
think investors will be best served in longerduration bonds
and locking in the currently high interest rates. https://www.morningstar.com/markets/whereinvestbonds2024 Market data
website: FINRA: https://www.finra.org/finradata/fixedincome/corpandagency
(FINRA bond market data) For example: In class
exercise 1.
What is the coupon payment per year for the bond? a) $28 b) $41 c) $34 Answer: b Explanation:
Coupon payment per year is calculated as (Coupon Rate * Face Value). Here,
Coupon Rate is 4.1% and the Face Value is $1000. So, the coupon payment per
year = 4.1% * $1000 = $41. 2.
What is the yield to maturity (YTM) of the bond? a) 5.18
% b)
4.41% c)
3.79% Answer: a Explanation:
Yield to maturity (YTM) is the total return anticipated on a bond if it is
held until the end of its maturity. Since the bond is callable, the yield to
call (YTC) would be the more appropriate measure. However, without the call
price or the call premium, it's challenging to calculate the YTC accurately. 3.
When is the next call date for the bond? a)
February 8, 2062 b)
August 8, 2060 c)
March 13, 2024 Answer: a Explanation:
The next call date is provided in the bond information as February 8, 2062. 4.
What is the maturity date of the bond? a)
August 8, 2062 b)
February 8, 2062 c)
March 13, 2025 Answer: a Explanation:
The maturity date is provided in the bond information as August 8, 2062. 5.
Is the bond callable? a) Yes b) No c)
Insufficient information Answer: a Explanation:
The bond information indicates that the bond is callable. 6.
What was the last trade price of the bond? a)
$818.8 b) $280 c)
$1000 Answer: a Explanation:
The last trade price of the bond is provided as 81.88%*1000 = $818.8. 7.
What is the bond's face value? a)
$818.8 b)
$1000 c)
$4.10 Answer: b Explanation:
The face value of the bond is typically $1000, as it represents the principal
amount repaid to the bondholder at maturity. 8.
What is the current yield of the bond? a) 4.87% b)
4.41% c)
5.00% Answer: c Explanation:
Current yield is calculated as (Annual coupon payment / Current price) * 100.
Here, the annual coupon payment is $41, and the current price is $818.8. So,
the current yield = ($41 / $818.8) * 100 ≈ 5%. Relationship
between bond prices and interest rates (Khan academy)
In class exercise 1) What
is the face value (par value) of the bond? a. $500 b. $1,000 c. $1,500 2) How
often are coupon payments made on the bond? a. Annually b. Semiannually c. Quarterly 3) If
the bond has a twoyear maturity, what is the total number of coupon payments
made over its life? a. 2 b. 4 c. 6 4) If
interest rates rise after the bond is purchased, what happens to its price? a. Increases b. Decreases c. Remains unchanged 5) If
interest rates go down, what is the likely impact on the bond's price? a. Increases b. Decreases c. Remains unchanged 6) For
a zerocoupon bond with a face value of $1,000 and a twoyear maturity, what is
the price if the expected return is 10% per year? a. $823 b. $1,000 c. $1,100 7) In
the scenario of increased expectations, if the expected return is now 15% for
the same zerocoupon bond, what happens to its price? a. Increases b. Decreases c. Remains unchanged 8) If
the expected return decreases to 5% for the same zerocoupon bond, what is
the new price? a. $822 b. $905 c. $1,000 9) What
does a bond trading at a premium mean? a. Its price is below par b. Its price is above par c. Its price is equal to par 10) What does a bond
trading at a discount mean? a. Its price is below par b. Its price is above par c. Its price is equal to par 11) If interest rates are
lower than expected, how does it affect the price of a bond? a. Increases b. Decreases c. Increases 12) What is the primary
reason for a bond trading at a discount? a. High coupon rate b. Low market interest rates c. Low coupon rate 13) In the context of
bond pricing, what is the present value? a. Future value of cash flows b. Current value of future
cash flows c. Face value of the bond 14) Why does the price of
a bond decrease when interest rates rise? a. Increase in coupon payments b. Decrease in market
expectations c. Decrease in present value of
future cash flows 15) What does a bond
trading at par mean? a. Its price is below par b. Its price is above par c. Its price is equal to par Bond III – Bond Calculation Bond
Calculator Investing Basics: Bonds(video) In class exercise: Find
bonds sponsored by WMT https://www.finra.org/finradata/fixedincome/corpandagency just go
to www.finra.org, è Investor center è market
data è bond è corporate
bond ·
Search for Walmart bonds For discussion: ·
What are the ratings of the WMT bonds? How
does the rating agency rate a bond? Altman Z Score
video ·
Why some WMT bonds are priced higher than
the par value, while others are priced at a discount? ·
Why some WMT bonds have higher coupon
rates than other bonds? How does WMT determine the coupon rates? ·
Why some WMT bonds have higher yields than
other bonds? Does a bond’s yield change daily? ·
Which of the WMT bonds are the most
attractive one to you? Why? 2. 2.
Understand what is coupon, coupon rate, yield, yield to maturity, market
price, par value, maturity, annual bond, semiannual bond, current yield. 3. 3. Understand how to price bond Bond
price = abs(pv(yield, maturity, coupon, 1000))  annual coupon Bond
price = abs(pv(yield/2, maturity*2, coupon/2, 1000))  semiannual
coupon Also change the yield and observe the
price changes. Summarize the price change pattern and draw a graph to
demonstrate your findings. Again, when yield to maturity of
this semi_annual coupon bond is 4%, how should this WMT bond
sell for? 4. Understand how to calculate bond returns Yield
to maturity = rate(maturity, coupon, market price, 1000) 
annual coupon Yield
to maturity = rate(maturity*2, coupon/2, market price, 1000)*2
 semiannual coupon Bond
Calculator (www.jufinance.com/bond) For example, when the annual coupon bond
is selling for $1,100, what is its return to investors? For example, when the semiannual
coupon bond is selling for $1,100, what is its return to investors? 5. Current yield: For the above bond, calculate current yield. Note: current yield = coupon/bond price 6. Zero coupon bond: coupon=0 and treat it as semiannual coupon
bond. Example:
A ten year zero coupon bond is selling for $400. How much is its yield to
maturity? A ten year zero coupon bond’s yield to
maturity is 10%. How much is its price? 7.
coupon: use pmt function in excel. · =abs(pmt(yield to maturity, years
left to maturity, price, 10000) for annual coupon · =abs(pmt(yield to maturity/2, years
left to maturity*2, price, 10000)*2 for semiannual coupon 8. Understand what is bond rating and how to read those
ratings. a. Who
are Moody, S&P and Fitch? b. What
is WMT’s rating? c. Is
the rating for WMT the highest? d. Who
earned the highest rating? Supplement:
Municipal Bond ·
Corporate Bond Data is available at FINRA.ORG: https://www.finra.org/finradata/fixedincome/corpandagency · Muni Bond Data is available
at EMMA: https://emma.msrb.org/ · Treasury Securities Data is
available at Treasury Direct: https://www.treasurydirect.gov/ For class
discussion: · Shall you
invest in municipal bonds? · Are
municipal bonds better than investment grade bonds? The risks investing in a bond (videos,
FYI) · Bond investing: credit Risk (video) · Bond investing: Interest rate risk (video) · Bond investing:
increased risk (video) Homework ( due by 7/11) 1. Firm AAA’s bonds price =
$850. Coupon rate is 5% and par is $1,000. The bond has six years
to maturity. Calculate for current yield? (5.88%) 2. For a zero coupon bond, use
the following information to calculate its yield to maturity. (14.35%) Years left to maturity = 10 years.
Price = $250. 3. For a zero coupon
bond, use the following information to calculate its price. ($456.39)
Years left to maturity = 10 years. Yield = 8%. 4. Imagine that an annual
coupon bond’s coupon rate = 5%, 15 years left. Draw priceyield profile.
(hint: Change interest rate, calculate new price and draw the graph). 5. IBM
5 year 2% annual coupon bond is selling for $950. How much
this IBM bond’s YTM? 3.09% 6. IBM 10 year 4% semiannual coupon
bond is selling for $950. How much is this IBM bond’s YTM? 4.63% 7. IBM 10 year 5% annual coupon
bond offers 8% of return. How much is the price of this
bond? 798.7 8. IBM 5 year 5% semiannual coupon
bond offers 8% of return. How much is the price of this bond? $878.34 9. IBM 20 year zero coupon bond
offers 8% return. How much is the price of this bond? 208.29 10. Collingwood Homes has a bond
issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years.
The bonds have a par value of $1,000 and a market price of $964.20. Interest
is paid semiannually. What is the yield to maturity? (8.90%) 11. Grand Adventure Properties offers
a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2
percent and the maturity date is 11 years from today. What is the market
price of this bond if the face value is $1,000? ($895.43) 12. The zero coupon bonds of D&L
Movers have a market price of $319.24, a face value of $1,000, and a yield to
maturity of 9.17 percent. How many years is it until these bonds
mature? (12.73 years) 13. A zero coupon bond with a face
value of $1,000 is issued with an initial price of $212.56. The bond matures
in 25 years. What is yield to maturity? (6.29%) 14. The
bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually.
The bonds mature in 11 years and have a $1,000 face value. Currently, the
bonds sell for $989. What is the yield to maturity? (6.14%) Videos
 homework help (due by week 4) Part
I Q1Q2
Q3Q4 Q5Q8 Q9Q14 Quiz
2 Help Video
(Quiz 2 Due by
7/11/2024) Practice Quiz FYI only (not required) 1) Critical Thinking Challenge – Just choose one of the two questions
as follows from https://www.cnbc.com/2023/11/01/fixedincomebackinthespotlighthowinvestorscantakeadvantage.html: Option 1  The Impact of Rising Interest Rates on
Bond Investments: a. Describe the recent
shift in interest rates and its impact on bond investments. b. Discuss the reasons
behind the dramatic increase in interest rates and how this shift has
affected the bond market. Option 2  The Role of Active FixedIncome
Management in Volatile Markets: a. Discuss the importance
of adopting an active approach to fixedincome management in the current
volatile market. b. Explore how an active
approach allows for better returns and the flexibility to navigate
challenging market conditions. 2) A quick quiz on the
conceptual comprehension of the bond chapter (FYI only, not required): 
Bond Pricing Formula (FYI)
Bond Pricing Excel Formula Summary of
bond pricing excel functions To calculate bond price (annual coupon bond): Price=abs(pv(yield
to maturity, years left to maturity, coupon rate*1000, 1000) To calculate yield to maturity (annual coupon bond):: Yield
to maturity = rate(years left to maturity, coupon rate *1000, price, 1000) To calculate bond price (semiannual coupon bond): Price=abs(pv(yield
to maturity/2, years left to maturity*2, coupon rate*1000/2,
1000) To calculate yield to maturity (semiannual coupon
bond): Yield
to maturity = rate(years left to maturity*2, coupon rate *1000/2,
price, 1000)*2 To calculate number of years left(annual coupon bond) Number
of years =nper(yield to maturity, coupon rate*1000, price, 1000) To calculate number of years left(semiannual coupon bond) Number
of years =nper(yield to maturity/2, coupon rate*1000/2, price,
1000)/2 To calculate coupon (annual coupon bond) Coupon
= pmt(yield to maturity, number of years left, price, 1000) Coupon
rate = coupon / 1000 To calculate coupon (semiannual coupon bond) Coupon
= pmt(yield to maturity/2, number of years left*2, price, 1000)*2 Coupon
rate = coupon / 1000 

Week 4 
Chapter 8 Stock
Valuation Part
I Dividend payout and Stock Valuation For class
discussion: · Why can we
use dividend to estimate a firm’s intrinsic value? · Are
future dividends predictable? Refer to the following table for WMT’s dividend history WalMart Dividend History https://www.macrotrends.net/stocks/charts/WMT/walmart/dividendyieldhistory WMT Dividend History
https://www.nasdaq.com/marketactivity/stocks/wmt/dividendhistory WMT Dividend History
·
EXDIVIDEND DATE 03/14/2024 ·
DIVIDEND YIELD 1.36% ·
ANNUAL DIVIDEND $0.83 ·
P/E RATIO 32.01
For class discussion: What conclusions can be drawn from
the above information? Can we figure out the stock price
of WalMart based on dividend, with reasonable assumptions? Can you estimate the
expected dividend in 2024? And in 2025? And on and on… Can you write down the math equation
now? WMT stock price = ? WMT
stock price = npv(return, D_{1}, D_{2}, …D_{∞}) WMT
stock price = D_{1}/(1+r) + D_{2}/(1+r)^{2}
+ D_{3}/(1+r)^{3}
+ D_{4}/(1+r)^{4} + … Calculating the present value of
dividends when assuming dividends go to infinity can indeed be challenging.
To simplify the calculation, we can make the assumption that dividends grow
at a certain rate. Additionally, we can use the discount
rate 'r,' which is based on the Beta and Capital Asset Pricing Model (CAPM)
discussed in Chapter 13. By incorporating these assumptions, we can
streamline the calculation process for determining the present value of
dividends. https://www.nasdaq.com/marketactivity/stocks/wmt What information does each item in the table convey or
represent? From
finviz.com https://finviz.com/quote.ashx?t=WMT Part II: Constant Dividend
GrowthDividend growth model Calculate
stock prices 1) Given next dividends and price Po= Po= + Po= + + Po= + ++ …… Refer to http://www.calculatinginvestor.com/2011/05/18/gordongrowthmodel/ · Now let’s apply this Dividend
growth model in problem solving. Constant dividend
growth model calculator (www.jufinance.com/stock) Equations ·
Po=
D1/(rg) or Po= Do*(1+g)/(rg) ·
r
= D1/Po+g = Do*(1+g)/Po+g · g= rD_{1}/Po = r
Do*(1+g)/Po ·
D1 = Po *(rg); D0 =
Po*(rg)/(1+g) · Capital Gain yield = g · Dividend Yield = r – g = D_{1}
/ Po = Do*(1+g) / Po ·
D_{1}=Do*(1+g);
D_{2}= D_{1}*(1+g); D_{3}=D_{2}*(1+g)… Exercise: 1.
Consider the valuation of a common stock that
paid $1.00 dividend at the end of the last year and is expected to pay a cash
dividend in the future. Dividends are expected to grow at 10% and the
investors required rate of return is 17%. How much is the price? How much is
the dividend yield? Capital gain yield? 2. The
current market price of stock is $90 and the stock pays dividend of $3 (D1)
with a growth rate of 5%. What is the return of this stock? How much is the
dividend yield? Capital gain yield? Part III: NonConstant Dividend
Growth Calculate
stock prices 1) Given next dividends and price Po= Po= + Po= + + Po= + ++ …… Nonconstant
dividend growth model Equations P_{n}
= D_{n+1}/(rg) = D_{n}*(1+g)/(rg), since year n,
dividends start to grow at a constant rate. Where
D_{n+1}= next dividend in year n+1; Do
= just paid dividend in year n; r=stock
return; g= dividend growth rate; Pn=
current market price in year n; Po
= npv(r, D_{1}, D_{2}, …, D_{n}+P_{n}) Or,
Po = D_{1}/(1+r) + D_{2}/(1+r)^{2} + … + (D_{n}+P_{n})/(1+r)^{n } Calculator: NonConstant Dividend Growth Calculator In class exercise for
nonconstant dividend growth model 1.
You expect
AAA Corporation to generate the following free cash flows over the next five
years:
Since year 6, you estimate that AAA's free cash flows will
grow at 6% per year. WACC of AAA = 15% · Calculate the enterprise value for DM Corporation. · Assume that AAA has $500 million debt and 14 million shares
outstanding, calculate its stock price. Answer:
2. AAA pays no dividend
currently. However, you expect it pay an annual dividend of $0.56/share 2
years from now with a growth rate of 4% per year thereafter. Its equity cost
= 12%, then its stock price=? Answer:
Do=0 D1=0 D2=0.56 g=4%
after year 2 è
P2 = D3/(rg), D3=D2*(1+4%) è
P2 = 0.56*(1+4%)/(12%4%) = 7.28 r=12% Po=? Po =
NPV(12%, D1, D2+P2), D2 = 0.56, P2=7.28. SO Po = NPV(12%, 0,0.56+7.28) =
6.25 (Note: for nonconstant growth
model, calculate price when dividends start to grow at the constant rate.
Then use NPV function using dividends in previous years, last dividend plus
price. Or use calculator at https://www.jufinance.com/dcf/
) 3. Required return =12%.
Do = $1.00, and the dividend will grow by 30% per year for the next 4
years. After t = 4, the dividend is
expected to grow at a constant rate of 6.34% per year forever. What is the stock price ($40)? Answer:
Do=1 D1 =
1*(1+30%) = 1.3 D2=
1.3*(1+30%) = 1.69 D3 =
1.69*(1+30%) = 2.197 D4 =
2.197*(1+30%) = 2.8561 D5 =
2.8561*(1+6.34%), g=6.34% P4 =
D5/(rg) = 2.8561*(1+6.34%) /(12%  6.34%) Po = NPV(12%, 1.3, 1.69, 2.197,
2.8561+2.8561*(1+6.34%)) /(12%  6.34%)) = 40 Or use calculator at https://www.jufinance.com/dcf Part IV: How to pick stocks?
(FYI) How to pick
stocks – Does it work? PE ratio Stock screening tools ·
Reuters
stock screener to help select stocks http://stockscreener.us.reuters.com/Stock/US/ ·
FINVIZ.com http://finviz.com/screener.ashx use
screener on finviz.com to narrow down your choices of stocks, such as
PE<15, PEG<1, ROE>30% Summary of stock screening rules
from class discussion PEG<1 PE<15
Growth
rate>20 ROE>10% Analyst ranking:
strong buy only
current
price>5 HOMEWORK (Due with final) 1. Northern
Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases
at an average rate of 3.8 percent per year. The stock is currently selling
for $26.91 a share. What is the market rate of return? (14.60
percent) 3.
IBM just paid $3.00 dividend per share to
investors. The dividend growth rate is 10%. What is the expected dividend of
the next year? ($3.3) 5.
Investors of
Creamy Custard common stock earns 15% of return. It just paid a
dividend of $6.00 and dividends are expected to grow at a rate of 6%
indefinitely. What is expected price of Creamy Custard's stock? ($70.67) Homework Video of this
week Homework help video
(FYI) Quiz 3 Help Video Quiz 3
Practice 