# PRESENT VALUE AND BOND VALUATION (S2)

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For your Module 2 SLP, continue your research on the four companies that you selected for your Module 1 SLP. Whereas you focused on the stocks of each company in Module 1, we will now be looking at the bonds of these four companies. Do some research on credit ratings of the bonds of these companies as well as the yields and bond prices. Specifically, write a two-page paper presenting the following information: 1. What is the bond ratings of each of these companies? Do a search online and see what credit rating Standard & Poor’s or Moody’s has given these companies. What reasons do you see for the differences in credit ratings between these companies? 2. Go to FINRA’s Bond Center and click on the “search” button. Then enter the ticker symbol of the different companies to see their bond yields and maturity dates. You can also do a Google search on the bond yields for your four companies. Note that most companies have multiple bonds that are currently being traded. Which bond has the longest time before maturity? The least time to maturity? What are the bond prices and bond yields of these bonds? Discuss which of your four companies has the greatest bond yields and which ones have the lowest bond yields. Do these correspond well to the credit ratings that you found for these companies? 3. Pick out one bond from one of your four companies. Calculate the present value of this bond using the following steps: a. Look at the maturity date of the bond. If the maturity date is in five years, then assume you will get five more coupon payments before the bond matures. b. Look at the coupon rate for the bond and calculate what the coupon payments will be. For example, if the coupon rate is 4.3% then the payments should be $43. c. Take the interest rate you get at your local bank and use this as the discount rate. Calculate the present value of the final bond payment of $1,000 that you will get at the maturity date, and calculate the present value of each of the remaining coupon payments. Compare the present value you get with the current bond price. Divide the present value by ten and see if this is similar to the price of this bond that you see on Morningstar. Note that bond prices are quoted so a bond price of $1,000 would be denoted as “100” or a bond price of $1,100 would be “110”. Comparing the price to the present value you computed based on the interest rate you get from your local bank, is the bond a good value? For example, if you get a present value of $1,200 and the bond price is 110, then the bond is a good value given your bank’s interest rate. REFERENCES: PRESENT VALUE AND BOND VALUATION (S2) Clifford, J. (2014). Time value of money. ACDC Leadership. https://www.youtube.com/watch?v=nfkqCv3Rd_g Khan, S. (2008). Introduction to present value. Khan Academy. https://www.youtube.com/watch?v=ks33lMoxst0&t=483s Davis, A. (2016). Bond pricing. Retrieved from: https://www.youtube.com/watch?v=-DnARyndirI Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 5: Introduction to valuation: The time value of money. Fundamentals of Corporate Finance. McGraw Hill. http://highered.mheducation.com/sites/dl/free/0078034639/941423/Sample_Chapter.pdf Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 6: Interest rates and bond valuation. Corporate Finance. McGraw Hill. Retrieved from http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20121125110341494.pdf Davis, J. (2013). Present value of a single amount in Excel. Retrieved from: https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from: https://www.youtube.com/watch?v=kDOIuJbHpLc Moy, M. (2014). Bond valuation in Excel. Retrieved from: https://www.youtube.com/watch?v=H-_NP0UxX_U Optional Reading GCFLearnFree.org. (2016). Excel 2016: Functions. Retrieved from: https://www.youtube.com/watch?v=-9d4m79twdA Brigham, Davies (2013). Chapter 28: The time value of money. Intermediate Financial Management. Cengage Learning. Retrieved from: http://www.cengage.com/resource_uploads/downloads/0324594690_148107.pdf Gitman, L. (2005). Chapter 6: Interest rates and bond valuation. Principles of Managerial Finance. Pearson Education. Retrieved from: http://wps.aw.com/wps/media/objects/222/227412/ebook/ch06/chapter06.pdf Alternative links for Gitman article and video PowerPoint version of this chapter: http://wps.aw.com/wps/media/objects/338/347080/ebook/ch06/chapter06.pdf https://mbagroup12.files.wordpress.com/2012/03/gitman_12_prnc-mgt-fin13e_password_downloadslide_10.pdf https://www.youtube.com/watch?v=77_CM5LI7ic Bierman, H. (2010). Chapter 2: The time value of money. An Introduction to Accounting and Managerial Finance: A Merger Of Equals. Singapore: World Scientific. [EBSCO eBook Colllection] Droms, W. G., & Wright, J. O. (2015). Chapter 11: Mathematics of compound interest. Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know. New York: Basic Books. [EBSCO eBook Colllection]

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## PRESENT VALUE AND BOND VALUATION (S2)

For your Module 2 SLP, continue your research on the four companies that you selected for your Module 1 SLP. Whereas you focused on the stocks of each company in Module 1, we will now be looking at the bonds of these four companies. Do some research on credit ratings of the bonds of these companies as well as the yields and bond prices. Specifically, write a two-page paper presenting the following information: 1. What is the bond ratings of each of these companies? Do a search online and see what credit rating Standard & Poor’s or Moody’s has given these companies. What reasons do you see for the differences in credit ratings between these companies? 2. Go to FINRA’s Bond Center and click on the “search” button. Then enter the ticker symbol of the different companies to see their bond yields and maturity dates. You can also do a Google search on the bond yields for your four companies. Note that most companies have multiple bonds that are currently being traded. Which bond has the longest time before maturity? The least time to maturity? What are the bond prices and bond yields of these bonds? Discuss which of your four companies has the greatest bond yields and which ones have the lowest bond yields. Do these correspond well to the credit ratings that you found for these companies? 3. Pick out one bond from one of your four companies. Calculate the present value of this bond using the following steps: a. Look at the maturity date of the bond. If the maturity date is in five years, then assume you will get five more coupon payments before the bond matures. b. Look at the coupon rate for the bond and calculate what the coupon payments will be. For example, if the coupon rate is 4.3% then the payments should be $43. c. Take the interest rate you get at your local bank and use this as the discount rate. Calculate the present value of the final bond payment of $1,000 that you will get at the maturity date, and calculate the present value of each of the remaining coupon payments. Compare the present value you get with the current bond price. Divide the present value by ten and see if this is similar to the price of this bond that you see on Morningstar. Note that bond prices are quoted so a bond price of $1,000 would be denoted as “100” or a bond price of $1,100 would be “110”. Comparing the price to the present value you computed based on the interest rate you get from your local bank, is the bond a good value? For example, if you get a present value of $1,200 and the bond price is 110, then the bond is a good value given your bank’s interest rate. REFERENCES: PRESENT VALUE AND BOND VALUATION (S2) Clifford, J. (2014). Time value of money. ACDC Leadership. https://www.youtube.com/watch?v=nfkqCv3Rd_g Khan, S. (2008). Introduction to present value. Khan Academy. https://www.youtube.com/watch?v=ks33lMoxst0&t=483s Davis, A. (2016). Bond pricing. Retrieved from: https://www.youtube.com/watch?v=-DnARyndirI Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 5: Introduction to valuation: The time value of money. Fundamentals of Corporate Finance. McGraw Hill. http://highered.mheducation.com/sites/dl/free/0078034639/941423/Sample_Chapter.pdf Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 6: Interest rates and bond valuation. Corporate Finance. McGraw Hill. Retrieved from http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20121125110341494.pdf Davis, J. (2013). Present value of a single amount in Excel. Retrieved from: https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from: https://www.youtube.com/watch?v=kDOIuJbHpLc Moy, M. (2014). Bond valuation in Excel. Retrieved from: https://www.youtube.com/watch?v=H-_NP0UxX_U Optional Reading GCFLearnFree.org. (2016). Excel 2016: Functions. Retrieved from: https://www.youtube.com/watch?v=-9d4m79twdA Brigham, Davies (2013). Chapter 28: The time value of money. Intermediate Financial Management. Cengage Learning. Retrieved from: http://www.cengage.com/resource_uploads/downloads/0324594690_148107.pdf Gitman, L. (2005). Chapter 6: Interest rates and bond valuation. Principles of Managerial Finance. Pearson Education. Retrieved from: http://wps.aw.com/wps/media/objects/222/227412/ebook/ch06/chapter06.pdf Alternative links for Gitman article and video PowerPoint version of this chapter: http://wps.aw.com/wps/media/objects/338/347080/ebook/ch06/chapter06.pdf https://mbagroup12.files.wordpress.com/2012/03/gitman_12_prnc-mgt-fin13e_password_downloadslide_10.pdf https://www.youtube.com/watch?v=77_CM5LI7ic Bierman, H. (2010). Chapter 2: The time value of money. An Introduction to Accounting and Managerial Finance: A Merger Of Equals. Singapore: World Scientific. [EBSCO eBook Colllection] Droms, W. G., & Wright, J. O. (2015). Chapter 11: Mathematics of compound interest. Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know. New York: Basic Books. [EBSCO eBook Colllection]

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