Traditional approach to valuation, Financial Management

Assignment Help:

Under this approach of Valuation, all cash flows are discounted using single interest rate (discount rate).  For example: Consider the 5-year (7.00 percent) Treasury Security (maturing in 2010). Under this approach, all cash flows of this bond will be discounted by the same discount rate to calculate the present value of the cash flow. The discount rate used is the yield for the on-the-run issue obtained from the Treasury yield curve. For example, assume that yield for 7-year Treasury bill is 9%. Then, the practice is to discount each cash flow of each bond using a discount rate of 9%.

In the case of non-Treasury securities, a premium or yield is added to the on-the-run Treasury yield. For example, assume that non-treasury securities the appropriate yield spread is 175 basis points. In such a case, all cash flows will be discounted at the yield for the on-the-run 7-year Treasury bill issue of 9% plus 175 basis points.

On-the-Run Issue is the most recent issue of a security. As an issue ages its liquidity decreases and the spread tends to widen.


Related Discussions:- Traditional approach to valuation

Debentures, A 16% debenture of R5 000 is redeemable at a premium of 10% aft...

A 16% debenture of R5 000 is redeemable at a premium of 10% after 5 years. The fair rate of return on similar debentures is 14% before tax. Calculate the present value of the capit

Illustrate the nature of financial management, Q. Illustrate the Nature of ...

Q. Illustrate the Nature of Financial Management? Less Descriptive as well as More Analytical: - Financial management is less descriptive and more analytical. Because of the

Marketing, How to use integrated promotional mix to achieve marketing objec...

How to use integrated promotional mix to achieve marketing objectives

Determine stock turnover, a)   Year 2 Year...

a)   Year 2 Year 1   Stock turnover (350/500) * 365 = 255.5 days (250/450) * 365 = 202.7 days

Secured lbo financing or asset-based lending, Secured LBO Financing or Asse...

Secured LBO Financing or Asset-Based Lending Under asset-based lending, the borrower pledges certain assets as collateral. Asset-based lenders look at the borrower's assets as

Components of a callable bond, Components of a Callable Bond A callable...

Components of a Callable Bond A callable bond can be thought of as the sale of a call option by the investor to the issuer as it allows the issuer to repurchase the bond from t

Average of relatives method, Average of Relatives Method We have seen ...

Average of Relatives Method We have seen the construction of an index number using the aggregates method. In this section, we shall see the construction of an index using the

Specialized stock indexes, Specialized Stock Indexes The most regularly...

Specialized Stock Indexes The most regularly quoted market indices are those that include the stocks of the largest listed companies on a nation's largest stock exchange. Examp

Net income that the company distributes to shareholders, The dividend is th...

The dividend is the part of the net income that the company distributes to shareholders. As the dividend represents real money, the net income is also real money. Is that true?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd