CLASS EXERCISE FOR SECURITY VALUATION

1. Sharjah Corporation has issued consol or perpetual bonds with coupon payments of $60. If the
prevailing market interest rate at the time they are issued is 6%, at price the consol bond can
be sold to the public.

Perpetual bonds

Value of bond = c/kd

C = coupon

Kd = discount rate

C= $60

Kd= 0.06

60/0.06

$1000 par

2. FUJAIRAH Corporation has issued consol or perpetual bonds with coupon payments of $50. If
the prevailing market interest rate at the time they are issued is 8%, at price the consol bond
can be sold to the public.

C= $50

Kd = 0.08

Value of bonds = c/kd

$625 discount

3. Find the price of a $1,000 par value bond that matures in 10 years, if it pays interest annually,
based on 6% coupon rate and if the market rate of interest is 5%

C= 60

Mv =1000

N = 10

Kd =0.05

Nonzero coupon rate.

 Using table = c(pvifa,I,n) +mv (pvif,I,n)

60(7.7217) + 1000(0.6139)

463.302+613.9

$1077. Premium

4. Find the price of a $1,000 par value bond that matures in 8 years, if it pays interest annually,
based on 7% coupon rate and if the market rate of interest is 5%

Mv 1000

Kd 5%

C= 7%

N=8

Using table C (pvifa,I,n)+mv(pvif,I,n)

70(6.4632) +1000(0.6768)

$1129

5. Find the price of a $1,000 par value bond that matures in 10 years, if it pays interest annually,
based on 8% coupon rate and if the market rate of interest is 6%

Mv = 1000

N = 10

C=8

Kd = 0.06

Using table c(pvifa,I,n)+mv(pvif,I,k)

80(7.3601) +1000(0.5584)

$1147
 6. Etisalat bond has a 10% coupon rate and a $1,000 face value. Interest payments are made
semiannually, and the bond has 20 years to maturity. Investors require a 12% yield. What is
the bonds market value?

Mv 1000

N 20*2= 40

Kd 12/2 =6

C = 10/2 = 5% = 50

C(pvifa,I,k) + Mv(pvif.i,k)

50(15.046) + (1000(0.0972)

849.5 discount bonds

7. Du bond has a 8% coupon rate and a $1,000 face value. Interest payments are made semiannually,
and the bond has 10 years to maturity. Investors require a 10% yield. What is the bonds market value?

Mv = 1000

C = 8/2 = 4%

Kd = 10/2 = 5%

N = 10*2 = 20

None zero coupon = using table C (pvifa,I ,k)+ mv (pvif,I ,k)

40(12.462) +1000(0.3769)

875.38 discount bonds

8. Dubai LLC bond has a 6% coupon rate and a $1,000 face value. Interest payments are made
semiannually, and the bond has 20 years to maturity. Investors require a 8% yield. What is the bonds
market value?

Mv = 1000

C = 6/2 = 3

Kd = 8/2 = 4

N = 20*2= 40

Non Zero coupon

Using table = C(pvifa,I,k)+mv(pvif,I,k)

30(19.793) +1000(0.2083)

802 discount bonds

9. Air Arabia bond has a 10% coupon rate and a $1,000 face value. Interest payments are made
quarterly, and the bond has 20 years to maturity. Investors require a 12% yield. What is the bonds
market value?

Mv 1000

C = 10/4 = 2.5%

Kd = 12/4 = 3

N =20*4 = 40

Using table C(pvifa,I,k)+mv(pvif,I ,k)

25(23.115) +1000(0.3066)

884.475 discount bonds

10 The value of a 20-year-old zero coupon bond when the market required rate of return is 9%

Mv = 1000

Kd =9%

N = 20

mv(pvif,I,k)

1000(0.1784)

718.4 discount

11 The value of a 10 year old zero coupon bond when the market required rate of return is 11%

Mv = 1000

Kd = 11%

N = 10

Zero coupon = mv(pvif,I,k)

1000(0.3855) =352.3 discount

12 The value of a 15 year old zero coupon bond when the market required rate of return is 8%

Mv 1000

Kd = 8%

N = 15

Zero coupon mv(pvif,I,k)

1000(0.3152)

315.2 discount bonds

13 The value of a 5 year old zero coupon bond when the market required rate of return is 9%

mv= 1000

kd= 9%

N= 5

MV(pvif,I,k)

1000(0.6499)

650 discount bonds

14. Nokia 6% (2015) bonds are maturing in 3 years. The discount rate is 10%. The face value is $1,000

a. Calculate the price of the bond

c = 6%

n=3

KD= 10%

Mv 1000

C(pvifa,I,k)+1000(pvif,I,k)

60 (2.4869) +1000(0.7513)

900.514 discount bonds

b. Is it a discount bond or premium bod?

15. Black berry 5% (2015) bonds are maturing in 3 years. The discount rate is 10%. The face value is
$1,000

a. Calculate the price of the bond

mv = 1000

c = 5 = 50

kd = 10%

N= 3

Using table C(pvifa,I,k)+mv(pvif,I,k)

50(2.4869) +1000(0.7513)

875.645 it is discount bond

b. Is it a discount bond or premium bod?

16. Dubai 9% (2015) bonds are maturing in 5 years. The discount rate is 7%. The face value is $10,000

a. Calculate the price of the bond

b. Is it a discount bond or premium bod?

Mv = 10000

C = 9%

Kd = 7%

N=5

Using tale C(pvifa.i.k) + mv(pvif,I k,)

900(4.1002)+10000(0.7835)

11525.18

premium

17. Vodafone 10% (2015) bonds are maturing in 3 years. The discount rate is 10%. The face value is
$10,000

a. Calculate the price of the bondb. State whether Vodafone bonds are premium bonds or par
bonds or discount bonds.

Mv = 10000
C = 1000

Kd= 10

N=3

Using table = c( pvifa,I,k)+mv(pvif,I,k)

1000(2.4869)+1000(0.7513)

10000

Par bonds

18. Financial analysts forecast Safeco Corp. growth for the future to be 10%. Safeco’s recent dividend
was $1.20. What is the value of Safeco stock if the required return is 12%.

19. Financial Analysts forecast Limited Brands growth for future to be 12.5%. LTD’s most recent
dividend was $0.60. What is the value of LTD Brands stock when the required return is 14.5%.

Value of Common stock or equity = Dividend / (cost of equity - growth)

Growth = 12.5%

Dividend = 0.60

Cost of equity = 14.5%

0.60/(0.145-0.125) =30

20. A preferred stock from Duquesne Light Company pays $2.10 in annual dividends. If the required
return on the preferred stock is 5.4%, what is the value of the stock?

D = 2.10

Preferred stock 5.4%

Value of Preferred stock = Dividend / cost of preferred stock

2.10/5.4%

38.888

21. A preferred stock from Hecla Mining Co. pays $ 3.50 in annual dividends. If the required return on
the preferred stock is $6.8%, what is the value of the stock?
3.50/6.8

51.47

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Q Find the duration of a 4-year bond with 10% coupon paid annually with a 10% yield

Time Cash flow Pv @10% % of value Wt*t

pv/price
1 100 90.09 9.0166% 0.0901
2 100 82.64 8.2710% 0.1654
3 100 75.13 7.5193% 0.2255
4 1100 751.3 75.1939% 3.007
=999.15 100% 3.488 year

A financial market is a market in which people trade financial securities, and commodities, at a low
transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and
commodities include precious metals or agricultural products.

The primary role of financial market is. Financial intermediation(middle man)

Channeling of funds from surplus units are the people who have money they can savers, lenders
households, firms, and governments

to deficit units are the people who need money spenders borrowers households, firms and
governments) .

Primary Markets

markets in which users of funds (e.g. corporations, governments) raise funds by issuing financial
instruments (e.g. stocks and bonds)

Secondary Markets

markets where financial instruments are traded among investors (e.g. Bolsa Madrid, NYSE, NASDAQ

Money Markets

markets that trade debt securities with maturities of one year or less (e.g. Spanish Government bonds,
U.S. Treasury bills)

Capital Markets
markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year

Markets in which derivative securities traded.

The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets.

Derivative security is a financial security (such as a futures contract, option contracts, swap contract, or
mortgage-backed security) whose payoffs are linked to another, previously issued securities.

Agreement to exchange a standard quantity of assets at a set price on a specific date in the future,

Main purpose of derivatives markets is to transfer risk or hedge between market participants

Types of FIs

Commercial banks

depository institutions whose major assets are loans and major liabilities are deposits

savings banks

depository institutions in the form of savings banks, savings and loans, credit unions, credit cooperatives

Insurance companies

financial institutions that protect individuals and corporations from adverse events

Securities firms and investment banks

financial institutions that underwrite securities and engage in securities brokerage and trading

Finance companies

financial institutions that make loans to individuals and businesses

Mutual Funds

financial institutions that pool financial resources and invest in diversified portfolios

Pension Funds

financial institutions that offer savings plans for retirement

services performed by financial intermediaries

Monitoring Costs
aggregation of funds provides greater incentive to collect a firm’s information and monitor actions

Liquidity and Price Risk

provide financial claims to savers with superior liquidity and lower price risk

Transaction Cost Services

transaction costs are reduced through economies of scale

Maturity Intermediation

greater ability to bear risk of mismatching maturities of assets and liabilities

Denomination Intermediation

allow small investors to overcome constraints imposed to buying assets imposed by large minimum
denomination size

Behavioral finances is a relatively new field of study. The idea is to look at the reasons that people make
the money choices they do (those choices are often irrational). ... By extension, the personal decisions
that people make about money can be extended to influence the economy.

Important:

Behavioural Finance seeks to account for this behaviour, and covers the rationality or otherwise
of people making financial investment decisions. Understanding Behavioural Finance helps us to
avoid emotion-driven speculation leading to losses, and thus devise an appropriate wealth
management strategy

The psychological factors that influence the saving behavior were parental socialization, peer influence
and financial literacy and self-control