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The first step in valuation process is to estimate the cash flows that are expected to be received in the future. In debt securities, there are two types of possible cash flow: Interest and principal repayment. The estimation of cash flow is not easy excluding few securities such as government-dated securities. Government dated securities have known interest payments, so estimating cash flow becomes very easy for these kinds of securities. However, there are securities coming with different types of options; estimating cash flow for these securities is a little difficult. Examples of these kinds of securities are as follows:
Securities with an option to issuer or investor, to change the contractual due date of repayment of principal. For example, Callable bonds, Putable bonds, Asset-backed securities and Mortgage-backed securities.
Securities in which coupon payment is fixed periodically based on a formula that depend on some reference rates, prices or exchange rates. For example, Floating-Rate Securities etc.
Securities that give choice to the investor to convert the securities into shares. For example, convertible bonds, exchangeable bonds etc.
Define the following terms that relate to a convertible bond: conversion ratio, conversion value, and straight bond value. The term conversion ratio is the number of shares of c
To evaluate a company using enterprise discounted cash flow (DCF), we discount free cash flow by the weighted average cost of capital (WACC). The weighted average cost of capital r
In all previous illustrations, we assumed that coupon payments are paid on annual basis. However, most of the bonds carry interest payment semi-annually. Semi-ann
The issuer offers bonds with an option to the investor to convert these bonds into equity shares at a pre-fixed ratio. These can be fully convertible bonds or partly co
The capital structure of Wild West Inc. is as follows: Debts: $5,000,000 (face value) bonds with coupon rate at 8.00% and current price at par Preferred shares: $2,000,000
Expected volatility is a major factor that affects the value of an option. Expected volatility of an option on bond is referred to as 'expected yield volatility'. The
A. Mitt starts Examine Your Zipper Incorporated ("XYZ") in 2012 by selling common stock of $12,000,000. He promises the investors in his company a 15% return on their capital. B
bajaj electronics case
Define the term in brief -Called-up share capital Called-up share capital that you may find in some of balance sheets. It refers to that part of subscribed capital, which share
ADVANTAGES OF BUDGETARY CONTROL 1. Profits are maximizes. 2. It makes easy the controlling of activities. 3. Effective co-ordination is made achievable. 4. Executive
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