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Different Valuation Models

1) Valuation - zero-coupon bond
A U.S. Government bond has a face amount of $10,000 with 8 years to maturity, yielding 3.5%. What is the current selling price?

2) Valuation - corporate bond
A $1,000 corporate bond with 20 years to maturity pays a coupon of 7% (semi-annual) and the market required rate of return is either a) 6.6% or b) 13%. What is the current selling price for both a) and b)?

3) Valuation - corporate bond
A $1,000 corporate bond with 10 years to maturity pays a coupon of 8% (semi-annual) and the market required rate of return is a) 7.2% or b) 10%. What is the current selling price for a) and b)?

4) Valuation - Constant growth - common stock.
What is the value of a share of common stock that paid $1.60 last year, with a growth rate of 7%, assuming the risk free rate is 4%, the market return is 9% and the beta is 1.4?

5) Valuation - zero-coupon bond
A U.S. Government bond has a face amount of $10,000 with 13 years to maturity, yielding 5.5%. What is the current selling price?

Solution Preview

1) Valuation - zero-coupon bond
Face Value of bond=M=$10000
Number of periods=n=8
Yield=r=3.5%
The current price of zero coupon bond=M/(1+r)^n=10000/(1+3.5%)^8 =$7594.12

2) Valuation - corporate bond
a) 6.6% market required rate of return
Maturity amount=Face Value=M=$1000
Coupon Amount=C=1000*7%/2=$35
Number of coupon payments=n=20*2=40
Semi annual required rate of return=r=6.6%/2=3.3%
Current price of the bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n
=35/3.3%*(1-1/(1+3.3%)^40)+1000/(1+3.3%)^40
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Solution Summary

There are 5 problems related to valuation of zero coupon bonds and coupon paying bonds and constant growth stocks. Solutions to these problems depict the step by step methodology to estimate the current value of zero coupon bond, coupon paying bond and stocks with constant growth. Calculations are carried out with the help of suitable formulas.

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