Friday, August 1, 2008


Long term bonds are more price sensitive. Determining the value of a bond based on its risk; default premium. Influenced by credit rating (speculative/investment grade) and priority of being paid the face value. One basis point = 0.01%.

Corporate bond innovations: zero coupons where bonds are sold at a deep discount; floating rate bonds have their coupon rate reset periodically; convertible bond where bonds can be converted to shares.

Lecturer forgot that he skipped a couple of slides on Wednesday. Realised yield is tangible. Bond valuation now finished.

Valuing shares: Net Tangible Asset; earnings per share * P/E multiple; discounted cash flow.

Limitations of NTA
Based on historical cost less accumulated depreciation, ignores intangible assets and future growth. Liquidation value.

Limitations of multiples
Not practical with negative cash flow or growing rapidly, selecting comparable companies to guess P/E ratio, earnings not the same as cash flow, P/E ratio is based on market price which is speculative.

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