1、2022-10-1Chap4 Bond and StockChapter Outlinel1.Source of financing l2.Basic elements of bondl3.Bond evaluation l4.Bond features and classificationl5.Bond ratingsl6.Bond Marketsl7.Evaluation principle of Stocksl8.Features of Common stocks and preferred stocks2022-10-12022-10-11.Source of financinglIn
2、ternal financing:l Future contributions made by ownersl Retained earningslExternal financing:l Debt financing:loan;bondl Equity financing:stock2022-10-12.Basic elements of bond lBond(债券)lPar value(面值)lCoupon rate(券面利率)lCoupon payment(利息支付)lMaturity date(到期日)lTime to maturity(到期时间)lYield to maturity(
3、到期收益率)2022-10-1Yield to maturitylIt refers to the rate of return anticipated on a bond if it is held until maturity.lSimilar to average annual rate of returnlUse it as the discount rate that makes the PV of future cash flows equal to the PV of the bond2022-10-1PV of Cash Flows as Rates ChangelValuat
4、ion principle:lPV of bond=PV of future cash flows lBond Value=PV of coupons+PV of parlBond Value=PV annuity+PV of lump sumlRemember,as interest rates increase the PVs decreaselSo,as interest rates increase,bond prices decrease and vice versa2022-10-13.Bond evaluationWhere:F:face vale C:coupon paymen
5、tsr:yield to maturity t:time to maturity(usually in years)Bond-Pricing EquationBond value=C 1-1/(1+r)t/r +F/(1+r)t2022-10-1 Bond valuelConsider a coupon bond with face vale 1000 maturing in 10 years,coupon rate 10%,suppose yield to maturity is 10%,what is the value of this coupon bond?00129101001001
6、0010010002022-10-1SolutionslFirst,under 10%yield to maturity,the present value of the 1000 paid in 10 years is:lPresent value=1000/(1+0.10)10=385.5 lSecond,the 100 coupons continue for ten years;the present value of this annuity is:lAnnuity present value=100 (1-1/1.1010)/0.10=614.5lWe add the value
7、of the two parts together to get the bonds value:lValue of the bond=385.5+614.5=1000()2022-10-1Valuing a Discount Bond with Annual CouponslConsider a bond with a coupon rate of 10%and coupons paid annually.The par value is$1000 and the bond has 5 years to maturity.The yield to maturity is 11%.What i
8、s the value of the bond?Using the formula:lB=PV of annuity+PV of lump sumlB=1001 1/(1.11)5/.11+1000/(1.11)5lB=369.59+593.45=963.042022-10-1Valuing a Premium Bond with Annual CouponslSuppose you are looking at a bond that has a 10%annual coupon and a face value of$1000.There are 20 years to maturity
9、and the yield to maturity is 8%.What is the price of this bond?Using the formula:lB=PV of annuity+PV of lump sumlB=1001 1/(1.08)20/.08+1000/(1.08)20lB=981.81+214.55=1196.362022-10-1Graphical Relationship Between Price and YTM2022-10-1Bond Prices:Relationship Between Coupon and YieldlIf YTM=coupon ra
10、te,then par value=bond pricelIf YTM coupon rate,then par value bond priceWhy?Selling at a discount,called a discount bondlIf YTM coupon rate,then par value bond priceWhy?Selling at a premium,called a premium bond2022-10-1Table:Value of a bond2022-10-14.Bond features and classification Differences Be
11、tween Debt and EquitylDebtNot an ownership interestCreditors do not have voting rightsInterest is considered a cost of doing business and is tax deductibleCreditors have legal recourse if interest or principal payments are missedExcess debt can lead to financial distress and bankruptcylEquityOwnersh
12、ip interestCommon stockholders vote for the board of directors and other issuesDividends are not considered a cost of doing business and are not tax deductibleDividends are not a liability of the firm and stockholders have no legal recourse if dividends are not paidAn all equity firm can not go bank
13、rupt2022-10-1The Bond Indenture(债券契约债券契约)lContract between the company and the bondholders and includesThe basic terms of the bonds(债券的基本条款)The total amount of bonds issued(债券发行总量)A description of property used as security,if applicable(对用作担保的财产的描述)Sinking fund provisions(偿付条款)Call provisions(赎回条款):
14、callable vs.non-callableDetails of protective covenants(保护性条款的细节)2022-10-1Protective covenantslPositive protective covenantsl Must maintain collateral or mortgage in good conditionl Must maintain working capital at or above certain levellNegative protective covenantsl Can not issue new debt before t
15、he old being repaidl Can not sell major asset without consent from lenders 2022-10-1Bond ClassificationslRegistered(记名债券)vs.Bearer Forms(不记名债券)lSecured(有担保的)and unsecured(无担保的)lSeniority(偿付顺序):senior bond(优先);subordinated bond(次级)lIssuer(发行主体):government bond;corporate bondlCredit rating(信用等级)：A,B,C
16、,D ect.2022-10-1Bond Characteristics and Required ReturnslThe coupon rate depends on the risk characteristics of the bond when issuedlWhich bonds will have the higher coupon,all else equal?Secured debt versus a unsecuredSubordinated debenture versus senior debt2022-10-15.Bond Ratings Investment Qual
17、ity(投资投资质量质量)lHigh GradeMoodys Aaa and S&P AAA capacity to pay is extremely strongMoodys Aa and S&P AA capacity to pay is very stronglMedium GradeMoodys A and S&P A capacity to pay is strong,but more susceptible to changes in circumstancesMoodys Baa and S&P BBB capacity to pay is adequate,adverse co
18、nditions will have more impact on the firms ability to pay2022-10-1Bond Ratings Speculative(投机投机)(fallen angels)lLow GradeMoodys Ba,B,Caa and CaS&P BB,B,CCC,CCConsidered speculative with respect to capacity to pay.The“B”ratings are the lowest degree of speculation.lVery Low GradeMoodys C and S&P C i
19、ncome bonds with no interest being paidMoodys D and S&P D in default with principal and interest in arrears2022-10-1Investment vs.speculative2022-10-1BuffettlGreat master of investmentlPrinciple of investment:l The first rule is not to lose.The second rule is not to forget the first rule.l Timing of
20、 buying stock:l We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.l Alert of risk:l Only when the tide goes out do you discover whos been swimming naked.2022-10-1SoroslCapital predatorlFounder of quantum fundlSpeculate on currency marketlTwo genius
21、have one thing in common:l Charity:It is a shame to die with great fortune.2022-10-1Other Bond TypeslGovernment bonds:Treasury SecuritiesFederal government debtT-bills pure discount bonds with original maturity of one year or lessT-notes coupon debt with original maturity between one and ten yearsT-
22、bonds coupon debt with original maturity greater than ten years Municipal SecuritiesDebt of state and local governmentsVarying degrees of default risk,rated similar to corporate debt2022-10-1Other Bond TypeslZero coupon bondslMake no periodic interest payments(coupon rate=0%)lThe entire yield-to-mat
23、urity comes from the difference between the purchase price and the par valuelCannot sell for more than par valuelSometimes called zeroes,or deep discount bonds2022-10-1lFloating rate bondslCoupon rate floats depending on some index valuelExamples adjustable rate mortgages and inflation-linked Treasu
24、rieslThere is less price risk with floating rate bondsThe coupon floats,so it is less likely to differ substantially from the yield-to-maturitylCoupons may have a“collar”the rate cannot go above a specified“ceiling”or below a specified“floor”Other Bond Types2022-10-1Other Bond TypeslDisaster bondslI
25、ncome bondslConvertible bondslPut bondlThere are many other types of provisions that can be added to a bond and many bonds have several provisions it is important to recognize how these provisions affect required returns2022-10-16.Bond MarketslPrimarily over-the-counter transactions with dealers con
26、nected electronicallylExtremely large number of bond issues,but generally low daily volume in single issueslMakes getting up-to-date prices difficult,particularly on small company or municipal issueslTreasury securities are an exception2022-10-1Quiz:Part onelHow do you find the value of a bond?lWhat
27、 is a bond indenture and what are some of the important features?lWhat are bond ratings and why are they important?2022-10-1 7.Evaluation principle of stockslCash Flows to Stockholders If you buy a share of stock,you can receive cash in two waysThe company pays dividendsYou sell your shares,either t
28、o another investor in the market or back to the company2022-10-1PV of StocklAs with bonds,the price of the stock is the present value of these expected cash flows lPV of stock=PV of dividends+PV of selling price2022-10-1Types of DividendslConstant dividend(固定股利)The firm will pay a constant dividend
29、foreverThis is like preferred stockThe price is computed using the perpetuity formulalConstant dividend growth(固定股利增长率)The firm will increase the dividend by a constant percent every periodlSupernormal growth(超常增长的股利)Dividend growth is not consistent initially,but settles down to constant growth eve
30、ntually2022-10-18.Features of Common Stock and preferred stocklCommon stock Voting Rights：Proxy voting(代理投票权)Classes of stock Other RightsShare proportionally in declared dividendsShare proportionally in remaining assets during liquidationPreemptive right first shot at new stock issue to maintain pr
31、oportional ownership if desired2022-10-1Dividend CharacteristicslDividends are not a liability of the firm until a dividend has been declared by the BoardlConsequently,a firm cannot go bankrupt for not declaring dividendslDividends and TaxesDividend payments are not considered a business expense,the
32、refore,they are not tax deductibleDividends received by individuals are taxed as ordinary incomeDividends received by corporations have a minimum 70%exclusion from taxable income2022-10-18.Features of common stock and Preferred StocklPreferred stock DividendsStated dividend that must be paid before
33、dividends can be paid to common stockholdersDividends are not a liability of the firm and preferred dividends can be deferred indefinitelyMost preferred dividends are cumulative any missed preferred dividends have to be paid before common dividends can be paid Preferred stock generally does not carry voting rights2022-10-1Quick Quiz:Part 2lWhat are some of the major characteristics of common stock?lWhat are some of the major characteristics of preferred stock?
