As with any financial instrument, the price of a bond is just the present value of the future cash flows. What is the price of Coupon rate: Years to maturity: Yield to maturity: Par value: 8.00% 10 7.50% $ 1,000 Since the bond has semiannual payments, the coupon payments will be Coupon payments: Now we can find the present value of the coupon payments, the present value of par, and the bond price, which are: Present value of coupon payments: Present value of par: Bond price: Although you can value a bond with the PV function, Excel has numerous functions that calculate bonds prices and much more. The bond price function in Excel is PRICE. What is the price of a bond with the following characteristics? Settlement date: Maturity date: Annual coupon rate: Yield to maturity: Face value (% of par): Coupons per year: 1/1/2000 1/1/2010 7.50% 8.40% 100 2 Bond price (% of par): Finding the YTM You can use the YIELD function in Excel to calculate the yield to maturity of a bond. Suppose we have a bond with the Settlement date: Maturity date: Annual coupon rate: Bond price 1% of par): Face value of par): Coupons per year: 1/1/2000 1/1/2015 6.80% 107.850 100 2 Yield to Maturity (TM): Unlike bond pricing, Excel does not have built-in functions for stock pricing, so we need to create our own equations. We will begin return are: Example 9.2 Stock Valuation Suppose an investor is considering the purchase of a share of the Utah Mining Company. The dividend information and required Perpetuity: Dividend next year: $ 3.00 PV = C/rel Dividend growth rate: 10.00% Required return: 15.00% So, the stock price today with the constant dividend growth model is: Stock price today: The constant dividend growth equation is just the present value of a growing perpetuity, but we could caution that the equation is very sensitive to the growth rate estimate. Using the same information from above, we can calculate the stock price for various growth rates. Example 9.3: Differential Growth Consider Elixir Drug Company, which is enjoying rapid growth from the introduction of its new back-rub cintment. You want to Initial growth rate: 15.0% Perpetuity: PVC/Ins) Years of initial growth rate: 5 Annuity: Second growth rate (perpet 10.00% PV = Required returns 15.00% - Dividend next year: S 1.15 First, we need to calculate the present value of the first 5 dividends, which will be: PV of dividend Dividend growth Dividend 1 15.00% 2 15.00% 3 15.00% 4 15.00% 15.00% Present value of first 5 dividends: We have the present value of the first 5 dividends. Now, we need to calculate the present value of the future stock price. The price Stock price in Year 5: And the present value of this future stock price is Present value of future stock price: The current stock price is the present value of the known dividends, plus the present value of the future stock price.or: Current stock price
