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 Assignment#01                                                                                             Marks 20

 

 

 

Stock valuation and Bond Valuation

In the business, there are many policies is working for doing success of business we need to hear check some important documents for the future investment. Stock is future investment but in the stock there are risk include, bonds are safe as compare to stocks.

  • Intrinsic value of the Bond

 

  • Calculation

 

  • Face value of bond =                      Rs 1000
  • Interest rate(rD) =                      12% semi annually
  • Market price of Bond =                      Rs 940
  • Market Interest Rate =                      14% per annum
  • CF = Cash Flow =                      Coupon Value

(Coupon Rate x Par Value)

  • 12*2*1000= Rs 240
  • PV=240/1.14 + 240/(1.14)2 + 240/(1.14)3 + 240/(1.14)4 + 240/(1.14)5 + 1000/(1.14)5

 

Market value                                       =          face value * percentage/100 * semiannually price

Semiannually price of bond                =          Rs 1,000 * 12 / 100 * 2 = Rs 240/-

PV = Intrinsic Value of Bond or Fair Price (in rupees) paid to invest in the bond. It is the Expected or Theoretical Price and not the actual Market Price.

PV= ∑ CFt / (1+r D )t = CF1/(1+r D ) + CFn / (1+r D ) 2 + CFn / (1+r D ) n + PAR / (1+r D ) n

  • Bond is undervalued as the face value that is Rs 1000 which is more than market value that is Rs.940.

                                                  

In our daily life, we are facing many risks in our work. Same as it we are facing some typical problem and situation in the business then we calculate the values of our stocks, value share and bonds. If market price < fair value, then Stock is undervalued by the market. It is a bargain and investors willing to buy it. Shares demand will rise and market price will rise to match the Fair value. If market price > fair value then stock is over valued.

 

 

 

  • Intrinsic Value of stock today
  • Calculation

 

Dividend year 1                      =                      Rs 6

Dividend year 1                      =                      Rs 7

Price of stock after 2 years     =                      Rs 55

Rate of return                          =                      14% per annum

 

PV=6/1.14 + 7/(1.14)2 + 55/(1.14)2

5.26 + 5.39 + 42.32 = Rs 52.97

 

  • stock is undervalued as the face value that is Rs 54 which is more than market value that is Rs 52.97.

as same price are high of dividend, it was going less to sale in the market and premium also in low, as per check details if bonds price are reduce and premium price high then investor must purchase the bonds. In efficient markets, stock price (and Value) depends on required return which depends on market risk. The required rate of return in efficient markets depends upon the risk premium which depends only upon the market risk and not on the total risk. We do not have to worry about company’s risk because we assume that investors are rational and maintain diversified portfolio.

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