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Securities
The
The
Risk
Valuation
Callable
Mortgage
V=
I
(1 + kd)1
t=1
(1 + kd)t
V = I / kd
I
(1 + kd)2
or
+ ... +
I
(1 + kd)
I (PVIFA k
[Reduced Form]
d,
kd
= 10%.
10%
= I / kd
[Reduced Form]
V=
I
(1 + kd)1
t=1
(1 + kd)
V = I (PVIFA k
I
(1 + kd)2
+ ... +
I + MV
(1 + kd)n
MV
(1 + kd)n
) + MV (PVIF kd, n)
d, n
[Table II]
V=
MV
(1 + kd)n
= MV (PVIFk
d, n
V
$57.00
I
/
2
I
/
2
I
/
2
+
MV
V =(1 + k /2 )1 +(1 + k /2 )2 + ... +
2 n
d
2*n
t=1
I/2
(1 + kd /2 )
= I/2 (PVIFAk
(1 + kd/2 ) *
MV
(1 + kd /2 ) 2*n
) + MV (PVIFkd /2 , 2*n)
/2 ,2*n
[Table II]
= $614.92 + $231.00
= $845.92
P0 =
t=1
I
(1 + kd )t
= I (PVIFA k
MV
+
(1 + kd )n
) + MV (PVIF kd , n)
d,n
kd = YTM
$1,250
$1,250
= $100(8.061) + $1,000(.275)
$1,250
= $806.10 + $275.00
=$1,081.10
[Rate is too high!]
$1,250
$1,250
$1,250
.02
X=
.07
YTM
.09
$1273
$1250
$1081
($23)(0.02)
$192
$23
X = .0024
$192
P0 =
2n
t=1
I/2
(1 + kd
+
/2 )
t
= (I/2)(PVIFAk
MV
(1 + kd /2 )2n
) + MV(PVIFkd /2 , 2n)
d /2, 2n
[ 1 + (kd / 2) ]2 -1 = YTM
V=
DivP
(1 + kP)
DivP
+ (1 + k
DivP
t=1
(1 + kP)
P)
+ ... +
DivP
(1 + kP)
or DivP(PVIFA k
P,
V = DivP / kP
= $100 ( 8% ) = $8.00.
$8.00
= 10%.
10%
= DivP / kP = $8.00 / 10%
= $80
kP = $10 / $100.
kP = 10%.
10%
V=
Div1
(1 + ke)1
Divt
t=1
(1 + ke)t
Div2
(1 + ke)2
+ ... +
Div
(1 + ke)
Equity investors
required return
V=
Div1
(1 + ke)1
n:
Pricen:
Div2
(1 + ke)2
Divn + Pricen
+ ... +
(1 + k )n
e
D0(1+g) D0(1+g)2
D0(1+g)
V = (1 + k )1 + (1 + k )2 + ... + (1 + k )
D1
=
(ke - g)
D1:
g:
ke:
VZG =
D1
(1 + ke)1
D1
ke
D2
(1 + ke)2
+ ... +
(1 + ke)
D1:
ke:
D1
= $3.24 ( 1 + 0 ) = $3.24
V =
t=1
D0(1+g1)
(1 + ke)
Dn(1+g2)t
t=n+1
(1 + ke)t
V =
t=1
D0(1+g1)t
(1 + ke)t
Dn+1
D1
D2
D3
D4
D5
D6
Growth of 8% to infinity!
D1
D2
D3
Growth Phase
#1 plus the infinitely
long Phase #2
D4
D5
D6
D
4
V3 =
k-g
0
D4
D5
D6
D1
D2
D3
New Time
Line
Where
V3
D4
V3 =
k-g
3
78
Actual
Values
5.46
Where $78 =
.15-.08
V=
V = $61.22
D0(1+.16)t
1
t=1
+
t
(1 + .15)
D4
(1+.15)n (.15-.08)
ke = ( $3 / $30 ) + 5%
ke = 15%
Key issues:
What is the difference between a real return and a
nominal return?
How can we convert from one to the other?
Example: