FIN 509 Class Web Page, Summer' 24

 

The Syllabus Grade Calculator Overall Grade Calculator

  

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

Or from here https://us.bbcollab.com/guest/1942dd4ed826463c9e058c9e8c52f4d4https://us.bbcollab.com/guest/1942dd4ed826463c9e058c9e8c52f4d4

 

 

       Weekly Q&A Session on Blackboard URL:

https://us.bbcollab.com/guest/04f276d959734ce49e45fcfd73d6b947

 

 

 

 

Class Schedule:

 

 

 

Topic and Activities,

class video web links

Assignments and Key Due Dates

Week 1

6/20 at 6 pm #117 (or online)

Time value of money, chapter 5

Class video link

Discussion Board #1 on market watch game, due by Thursday 7/11

Week 2

6/27 at 6 pm #117 (or online)

Discounted Cash Flow Valuation, chapter 6

 

Class video link

 

 

Quiz 1, due by Wednesday (7/3 ) 11:59 pm, start from 6/28 at 12 PM (on blackboard in week2 folder)

 

Homework of chapters 5, 6

due by Thursady 7/11

Week 3

7/4 at 6 pm #117 (or online)

Interest Rates and Bond Valuation, chapter 7

 

Class video link

 

 

Quiz 2, due by Wednesday (7/10 ) 11:59 pm, start from 7/5 at 12 PM (on blackboard in week3 folder)

 

Homework of chapter 7

due by Thursady 7/11

Week 4

7/11 at 6 pm #117 (or online)

 

Stock valuation, chapter 8

 

Class video link

 

 

Quiz 3, due by Wednesday (7/17) 11:59 pm, start from 7/12 at 12 PM (on blackboard in week4 folder)

 

Homework of chapter 8 due with final

 

Week 5

7/18 at 6 pm #117 (or online)

 

Capital Budgeting, WACC, chapters 9 &14

 

Class video link

 

Discussion Board # 2 on Fed Monetary Policy meeting, due with final

https://www.cnbc.com/2024/07/09/fed-chief-powell-says-holding-rates-high-for-too-long-could-jeopardize-economic-growth.html

 

  1. What are the two main risks that Jerome Powell highlighted in his remarks regarding interest rate policy?
  2. What recent trend in inflation data did Powell mention, and how has it influenced the Federal Reserve's confidence in achieving their 2% inflation target?
  3. According to Powell, what could be the potential consequences of reducing policy restraint "too late or too little"?

 

Quiz 4 (only chapter 9), due by Wednesday (7/24) 11:59 pm, start from 7/19 at 12 PM (on blackboard in week5 folder)

 

 

Homework of chapter 9 due with Final

 

Week 6

7/25 at 6 pm #117 (or online)

 

Chapter 13, risk and return

 

Class video link

Discussion Board # 3 on Bitcoin ETF News on CNBC due with final

https://www.youtube.com/watch?v=Uaz9Ahbqngw

       What does the acronym "ETF" stand for in the context of the cryptocurrency market?

       What is the significance of the approval of a Bitcoin ETF by regulators?

       What is the expectation regarding Bitcoin's price fluctuations in the short term?

 

Quiz 5, due by Wednesday (7/26) 11:59 pm, start from 7/21 at 12 PM (on blackboard in week6 folder)

 

 

Homework of chapter 13 due with Final

 

Week 7

Part I

8/1 Review and Final

Video

       Final on at 1 AM, on blackboard final folder, due by Sunday ()11:59 pm

      Final prep video (on youtube)

Week 7

Part II

Chapter 2, chapter 3, not required

 

Class video link

 

 

 

 

Week 0

Market Watch Game 

  Use the information and directions below to join the game.

1.      URL for your game: 
https://www.marketwatch.com/game/fin509-24summer

 

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

 

 

 

 

Pre-class assignment:

Set up marketwatch.com account and have fun

Week1,2

image002.jpg

 

 

 

 

Chapter 5 Time value of money Part 1

 

Chapter 5 In Class Exercise (Solution Word File)

 

Chapter 5 ppt 

 

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

 

image001.jpg

 

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 PPT

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: 
https://www.marketwatch.com/game/fin509-24summer

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.


Discussion Board Prompts

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, thought-provoking 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)

3. Today, you are purchasing a 15-year, 8 percent annuity at a cost of $70,000. The annuity will pay annual payments. What is the amount of each payment? ($8,178.07)

 

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)

5. Trevor's Tires is offering a set of 4 premium tires on sale for $450. The credit terms are 24 months at $20 per month. What is the interest rate on this offer? (6.27%)

6. Top Quality Investments will pay you $2,000 a year for 25 years in exchange for $19,000 today. What interest rate are you earning on this annuity? (9.42%)

7. You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum payment today. What is the interest rate on the annuity? (8.22%)

8. Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt? (4.0 years)


9.  Expansion, Inc. acquired an additional business unit for $310,000. The seller agreed to accept annual payments of $67,000 at an interest rate of 6.5 percent. How many years will it take Expansion, Inc. to pay for this purchase? (5.68 years)

10. You want to retire early so you know you must start saving money. Thus, you have decided to save $4,500 a year, starting at age 25. You plan to retire as soon as you can accumulate $500,000. If you can earn an average of 11 percent on your savings, how old will you be when you retire? (49.74 years)

11. You just received a credit offer in an email. The company is offering you $6,000 at 12.8 percent interest. The monthly payment is only $110. If you accept this offer, how long will it take you to pay off the loan? (82.17 months)

12. Fred was persuaded to open a credit card account and now owes $5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred to pay off this balance if he makes monthly payments of $70 rather than $85? (93.04 months)

13. Bridget plans to save $150 a month, starting today, for ten years. Jordan plans to save $175 a month for ten years, starting one month from today. Both Bridget and Jordan expect to earn an average return of 8 percent on their savings. At the end of the ten years, Jordan will have approximately _____ more than Bridget. ($4,391)

(Hint: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans 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 semi-annual 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 semi-annually? (10.78%) 

20. What is the effective annual rate of 9 percent compounded quarterly? (9.31%)

21. Fancy Interiors offers credit to customers at a rate of 1.65 percent per month. What is the effective annual rate of this credit offer? (21.70%)

 

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)

24. Three years ago, you took out a loan for $9,000. Over those three years, you paid equal monthly payments totaling $11,826. What was the APR on your loan? (18.69%)

 

 

FYI only: help for homework

Part 1(Qs 1-2) Part 2(Qs 4-8) Part 3(Qs 9-12)

Part 4(Qs 13-16) Part 5(Qs 17-20) Part 6(Qs 21-24)

(Q13: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans 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

Part I Part II Part III

 

Calculators


NPV calculator
 

 

NFV calculator

 

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))

 

image001.jpg

 

 

EAR = (1+APR/m)^m-1

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

 

Ppt

 

 

Part I - Yield Curve

 

https://finra-markets.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 1-month yield exceed the 10-year yield?

a) Long-term bonds are inherently riskier, leading to higher yields.

b) Investors prefer short-term investments due to greater liquidity.

c) Central bank policies exert stronger influence on short-term interest rates.

Answer: c

Explanation: Central banks often adjust short-term interest rates to manage economic conditions and inflation. Therefore, changes in short-term yields are more responsive to central bank actions compared to long-term yields, resulting in the 1-month yield exceeding the 10-year yield.

 

2.     2. Why might the 30-year yield be lower than the 1-year yield?

a) Investors expect lower inflation rates over the next 30 years compared to the next year.

b) Long-term bonds are perceived as safer investments, leading to lower yields.

c) Central bank policies are more accommodative to long-term 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 long-term bonds like the 30-year yield compared to short-term bonds like the 1-year yield. This inversion can signal expectations of economic slowdown or recession.

 

3.     Which factor could contribute to the 2-year yield being lower than the 1-month yield?

a) Market anticipation of future interest rate hikes in the short term.

b) Central bank interventions favor long-term borrowing.

c) Long-term bonds offer higher yields to compensate for risks.

Answer: a

Explanation: If the market anticipates interest rate hikes in the near future, short-term yields may rise, causing the 1-month yield to exceed the 2-year yield.

 

4.     Why might the 30-year yield be higher than the 10-year yield?

a) Investors anticipate higher inflation rates over the next 30 years.

b) Long-term bonds are perceived as riskier investments, leading to lower yields.

c) Long-term bonds are subject to increased uncertainty and volatility, resulting in higher yields.

Answer: c

Explanation: Long-term bonds, such as the 30-year yield, are exposed to greater uncertainty and volatility over an extended period compared to shorter-term bonds like the 10-year yield. This heightened risk and uncertainty lead investors to demand higher yields as compensation, resulting in the 30-year yield being higher than the 10-year yield.

 

5.     Why might the 2-year yield be higher than the 30-year yield?

a) Investors anticipate higher short-term inflation rates compared to long-term inflation rates.

b) Investors demand more long-term bonds due to higher economic risk.

c) Long-term bonds are perceived as safer investments, leading to lower yields.

Answer: b

Explanation: The 2-year yield might exceed the 30-year yield because investors seek the relative safety of longer-term investments amid higher economic risk. During periods of economic uncertainty or volatility, investors may prefer long-term bonds as a hedge against short-term market fluctuations. This increased demand for long-term bonds can drive up the price of the 30-year bonds, and drive down their yields, causing the 30-year yield to be lower than the 2-year yield. The yield curve is inverted!

 

6.     Why might the 1-month yield be more influenced by changes in central bank policies than the 2-year yield?

Options:

a) Short-term bonds are directly impacted by adjustments in key interest rates set by central banks.

b) Long-term bonds are less responsive to economic indicators.

c) Investors prefer short-term investments due to higher liquidity.

Answer: a

Explanation: Short-term yields are directly affected by changes in key interest rates set by central banks, making them more responsive to central bank policies compared to longer-term yields.

 

7.     Why might an inverted yield curve occur, where short-term yields are higher than long-term yields?

a) Investors anticipate higher short-term inflation rates compared to long-term inflation rates.

b) Investors demand more long-term bonds due to higher economic risk.

c) Long-term bonds are perceived as safer investments, leading to lower yields.

Answer: b

Explanation: An inverted yield curve, where short-term yields exceed long-term yields, can occur when investors seek the relative safety of longer-term investments amid higher economic risk. During periods of economic uncertainty or volatility, investors may prefer long-term bonds as a hedge against short-term market fluctuations, leading to increased demand and lower yields for long-term 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) Short-term yields are higher than long-term yields.

b) Long-term yields are higher than short-term yields.

c) Short-term and long-term yields are approximately equal.

Answer: b

Explanation: In a normal yield curve, long-term yields are typically higher than short-term yields. This upward-sloping 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 long-term interest rates.

 

9.     What does an inverted yield curve, where short-term yields exceed long-term 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 short-term yields exceed long-term 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 longer-term 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

 

Bond Type         

 Characteristics                                  

 Suitability                                 

 Risk                                   

Short-Term Bonds  

Quick maturity, Low risk, Lower returns         

Conservative, Need liquidity               

Reinvestment Risk                      

Long-Term Bonds   

Higher returns, High risk                       

Long-term, High risk tolerance              

Default Risk; Market interest rate risk

 Corporate Bonds   

Higher yields, Higher risk, Company influence   

Seeking returns, Accepting higher risk     

Default Risk; Market interest rate risk (assuming long maturity)

 Treasury Securities

Low risk, Steady income, Different maturities   

Conservative, Stable income requirement    

Market interest rate risk (assuming long maturity) 

 Municipal Bonds   

Tax advantages, Credit risk                     

Tax-efficient income, Higher tax bracket   

Default Risk; Market interest rate risk (assuming long maturity)

 

 

       Among the aforementioned bonds, do you have a preference? If so, what factors influence your choice?

 

 

 image141.jpg

Outlook for Investing in Bonds in 2024 (FYI only)

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 longer-duration bonds and locking in the currently high interest rates. https://www.morningstar.com/markets/where-invest-bonds-2024

 

  

 

 

 Market data website:

FINRA:      https://www.finra.org/finra-data/fixed-income/corp-and-agency   (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%.

 

 

 

 

 

 

image143.jpg 

 

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. Semi-annually 

c. Quarterly

 

3)     If the bond has a two-year 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 zero-coupon bond with a face value of $1,000 and a two-year 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 zero-coupon bond, what happens to its price?

a. Increases

b. Decreases 

c. Remains unchanged

 

8)     If the expected return decreases to 5% for the same zero-coupon 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/finra-data/fixed-income/corp-and-agency

 

just go to www.finra.org Investor center  market data  bond  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 bonds 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, semi-annual 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)) ------- semi-annual 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 ----- semi-annual 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 semi-annual 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 semi-annual 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 bonds 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 semi-annual coupon

 

 

8.      Understand what is bond rating and how to read those ratings.

a.       Who are Moody, S&P and Fitch?

b.      What is WMTs rating?

c.       Is the rating for WMT the highest?

d.      Who earned the highest rating?

 

 

Supplement: Municipal Bond

image051.jpg

https://emma.msrb.org/

 

       Corporate Bond Data is available at FINRA.ORG:  https://www.finra.org/finra-data/fixed-income/corp-and-agency

       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 AAAs 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 bonds coupon rate = 5%, 15 years left. Draw price-yield 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 bonds YTM?  3.09%

6.  IBM 10 year 4% semi-annual coupon bond is selling for $950. How much is this IBM bonds 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% semi-annual 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 Q1-Q2 Q3-Q4 Q5-Q8 Q9-Q14

 

 

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/fixed-income-back-in-the-spotlight-how-investors-can-take-advantage.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 Fixed-Income Management in Volatile Markets:

a.      Discuss the importance of adopting an active approach to fixed-income 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):

www.jufinance.com/bond.html

 

 

 

 

 

Bond Calculator

www.jufinance.com/bond

 

 

 

Bond Pricing Formula (FYI)

 

image033.jpg

 

 

 

image035.jpg

 

 

image036.jpg

 

 

image037.jpg

 

image038.jpg

 

 

 

 

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 (semi-annual coupon bond):

Price=abs(pv(yield to maturity/2, years left to maturity*2, coupon rate*1000/2, 1000)

 

To calculate yield to maturity (semi-annual 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(semi-annual 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 (semi-annual 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

 

ppt

 

Part I Dividend payout and Stock Valuation

 

 

For class discussion:

        Why can we use dividend to estimate a firms intrinsic value?

    Are future dividends predictable?

 

Refer to the following table for WMTs dividend history

 

 

Wal-Mart Dividend History

https://www.macrotrends.net/stocks/charts/WMT/walmart/dividend-yield-history

image153.jpg

 

WMT Dividend History

https://www.nasdaq.com/market-activity/stocks/wmt/dividend-history

 

WMT Dividend History

         EX-DIVIDEND DATE 03/14/2024

         DIVIDEND YIELD 1.36%

         ANNUAL DIVIDEND $0.83

         P/E RATIO 32.01

Ex/EFF Date

Type

Cash Amount

Declaration Date

Record Date

Payment Date

05/09/2024

Cash

$0.2075

02/20/2024

05/10/2024

05/28/2024

03/14/2024

Cash

$0.2075

02/20/2024

03/15/2024

04/01/2024

12/07/2023

Cash

$0.57

02/21/2023

12/08/2023

01/02/2024

08/10/2023

Cash

$0.57

02/17/2023

08/11/2023

09/05/2023

05/04/2023

Cash

$0.57

02/21/2023

05/05/2023

05/30/2023

03/16/2023

Cash

$0.57

02/21/2023

03/17/2023

04/03/2023

12/08/2022

Cash

$0.56

02/17/2022

12/09/2022

01/03/2023

08/11/2022

Cash

$0.56

02/17/2022

08/12/2022

09/06/2022

05/05/2022

Cash

$0.56

02/17/2022

05/06/2022

05/31/2022

03/17/2022

Cash

$0.56

02/17/2022

03/18/2022

04/04/2022

12/09/2021

Cash

$0.55

02/18/2021

12/10/2021

01/03/2022

08/12/2021

Cash

$0.55

02/18/2021

08/13/2021

09/07/2021

05/06/2021

Cash

$0.55

02/18/2021

05/07/2021

06/01/2021

03/18/2021

Cash

$0.55

02/18/2021

03/19/2021

04/05/2021

12/10/2020

Cash

$0.54

02/18/2020

12/11/2020

01/04/2021

08/13/2020

Cash

$0.54

02/18/2020

08/14/2020

09/08/2020

05/07/2020

Cash

$0.54

02/18/2020

05/08/2020

06/01/2020

03/19/2020

Cash

$0.54

02/18/2020

03/20/2020

04/06/2020

12/05/2019

Cash

$0.53

02/19/2019

12/06/2019

01/02/2020

08/08/2019

Cash

$0.53

02/19/2019

08/09/2019

09/03/2019

05/09/2019

Cash

$0.53

02/19/2019

05/10/2019

06/03/2019

 

 

For class discussion:

What conclusions can be drawn from the above information?

Can we figure out the stock price of Wal-Mart based on dividend, with reasonable assumptions?

 

Can you estimate the expected dividend in 2024? And in 2025? And on and on

 

image146.jpg

 

Can you write down the math equation now?

 

WMT stock price = ?

WMT stock price = npv(return, D1, D2, D)

WMT stock price = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + D4/(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/market-activity/stocks/wmt

 

image154.jpg

 

What information does each item in the table convey or represent?

 

From finviz.com   https://finviz.com/quote.ashx?t=WMT

 

image155.jpg

 

 

 

 

 

Part II: Constant Dividend Growth-Dividend growth model

Calculate stock prices

1)      Given next dividends and price expected to be sold for

Po= https://www.jufinance.com/fin509_19s/index_files/image013.gif 

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image017.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image021.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image023.gif+https://www.jufinance.com/fin509_19s/index_files/image025.gif

image086.jpg

Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/

 

        Now lets apply this Dividend growth model in problem solving.

 

 

Constant dividend growth model calculator  (www.jufinance.com/stock)

 

 

Equations

       Po= D1/(r-g) or Po= Do*(1+g)/(r-g)

 

       r = D1/Po+g = Do*(1+g)/Po+g; So r = total return = dividend yield + capital gain yield

 

       g= r-D1/Po = r- Do*(1+g)/Po

 

     D1 = Po *(r-g); D0 = Po*(r-g)/(1+g)

 

       Capital Gain yield = g = (P1-Po)/Po; P1: Stock price one year later (P1=D2/(r-g))

 

       Dividend Yield = r g = D1 / Po = Do*(1+g) / Po

 

       D1=Do*(1+g); D2= D1*(1+g); D3=D2*(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? (answer: 15.71, 7%, 10%)

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? (answer: 8.33%, 3.33%, 5%)

 

 

Part III: Non-Constant Dividend Growth

Calculate stock prices

1)      Given next dividends and price expected to be sold for

Po= https://www.jufinance.com/fin509_19s/index_files/image013.gif 

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image017.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image021.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image023.gif+https://www.jufinance.com/fin509_19s/index_files/image025.gif

 

Non-constant dividend growth model

 

Equations

Pn = Dn+1/(r-g) = Dn*(1+g)/(r-g), since year n, dividends start to grow at a constant rate.

Where Dn+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, D1, D2, , Dn+Pn)

Or,

Po = D1/(1+r) + D2/(1+r)2 + + (Dn+Pn)/(1+r)n

 

Calculator: Non-Constant Dividend Growth Calculator

 

 

In class exercise for non-constant dividend growth model

 

1.     You expect AAA Corporation to generate the following free cash flows over the next five years:

 

Year

1

2

3

4

5

FCF ($ millions)

75

84

96

111

120

 

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:

FCF grows at 6% ==> could use dividend constant growth model to get the value at year 5

Value in year five = FCF in year 6 /(WACC - g)

FCF in year 6 = FCF in year 5 *(1+g%), g=6%

FCF in year 6 = 120 *(1+6%)

value in year five = 120*(1+6%)/(15%-6%) = 1413.13

value in year 0 (current value) =1017.56 = npv(15%, 75, 84, 96, 111, 120+1413.13)

Note: Po = D1/(r-g) ==> Firm value = FCF1/(WACC-g) = FCFo *(1+g)/(WACC-g)

Assume that AAA has $500 million debt and 14 million shares outstanding, calculate its stock price.

equity value = 1017.56 - 500 = 517.56 millions

stock price = 517.56 / 14

 

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 P2 = D3/(r-g), D3=D2*(1+4%) 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 non-constant 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/(r-g) = 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; PEG ratio (peg ratio vs. PE ratio  video)

 

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)

2.     Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the expected amount of the next dividend? ($2.12)

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)

4.     The current market price of stock is $50 and the stock is expected to pay dividend of $2 with a growth rate of 6%. How much is the expected return to stockholders? (10%)

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

Part I Part II Part III Part IV