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

What are the corporate bonds, What are the Corporate Bonds? Corporate ...

What are the Corporate Bonds? Corporate bonds are issued by huge corporations while they require long-term financing. They generally make interest payments double a year (sem

What is substantive test, what is Substantive tests or transactions based a...

what is Substantive tests or transactions based auditing Tests to attain audit evidence to detect material misstatements in financial statements. Using analytical procedures an

Determine about the zero interest bonds, Determine about the Zero Interest ...

Determine about the Zero Interest Bonds (ZIBs) Very much alike DDBs, only crucial difference is that these are issued at face values (DDBs are issued at a discount to face valu

PV Annuity , What is the present value of an annuity that makes a quarterly...

What is the present value of an annuity that makes a quarterly payment of $37,110 for 11 years, assuming an annual yield to maturity of 5%?

Quantitative analysis, A researcher develops a regression model to understa...

A researcher develops a regression model to understand how student-to-teacher ratios affect test scores. The researcher theorizes that age, gender, and race do not impact test scor

Operating and financial leverage, explain the significance of operating lev...

explain the significance of operating leverage and financial with the help of example?

What do you mean by letter of credit, Q. What do you mean by Letter of Cred...

Q. What do you mean by Letter of Credit? A letter of credit is an arrangement whereby a bank helps its customer to obtain credit from its (customer's) suppliers. When a bank op

What is the value of ast stock, Brandon Michael Chu of Henry Law & Yang Yi ...

Brandon Michael Chu of Henry Law & Yang Yi Capital Limited believes that earnings and dividends at Alua Amanova & Shuwen Wang Technologies (AST) will continue to grow at 12% per ye

Deefine market price of a bond be influenced, If all other things held cons...

If all other things held constant, how would the market price of a bond be influenced if coupon interest payments were made semiannually in place of annually? Several bonds iss

Define correlation coefficient for two variables is -1, What does it mean w...

What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1? Correlation is

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