Angela Said:

What is implication of the dividend yield on the stock valuation?

We Answered:

In the long run, dividend yield has almost no bearing on the valuation of the stock. The stock's value is the discounted present value of its future free cash flows. If the cash dividend were kept in the company, it could be used to presumably generate more future value for the corporation.

In the short run, a cash dividend will reduce the value of the stock by some amount (not always the value of the cash dividend) once it goes ex-dividend. This is due to the payout of the cash taking out the potential for that cash to be invested into projects that can provide future value for the corp. Which was "priced" into the stock prior to the ex-dividend date and those investors expected to get the cash from holding the stock before ex-dividend.

The primary usage of dividend yield (and hence dividends) is for corporations to attract investors with desirable characteristics, in their eyes. By paying stable, increasing cash dividends a company signals to the market that it is stable and increasing value for shareholders regardless of the stock price going up or down and changes in accounting accruals.

Also the dividend yield will possibly attract long-term investors because of the predictability of the dividends make it comparable to coupon payments from a bond. And that may attract a wider range of investors who only invested in bonds.

Angela Said:

Is there a way I can get a bond valuation of a CMO for free?

We Answered:

Aside from looking up their cusip. You can also call or deposit them in a brokerage account and they will tell you.

Jean Said:

The bond valuation formula, what does the 1-1 stand for at the beginning how do you do this formula on a calc?

We Answered:

Consider a one-period reinsurance contract under which the reinsurer agrees to pay a fixed amount L at the end of the period if a defined catastrophic event occurs.
The reinsurer issues a one-period reinsurance contract that pays L at the end of the period, if there is a catastrophe. It pays nothing if no catastrophe occurs. L is known when the policy is issued. If qcas denotes the probability of a catastrophic event and P the price of the reinsurance, then the fair value of the reinsurance is

P = 1/(1+r) –(qcas *L)

where r is the one period effective default-free interest rate. This defines a one-to-one correspondence between bond prices and probabilities of a catastrophe. (The bond price varies with the probability of a catastrophe).
Since the reinsurance market will determine the price P, it is natural to call qcas the reinsurance market assessment of the probability of a catastrophe.

Jeanne Said:

What is the impact of an increase in the prevailing interest rate on the valuation of a bond?

We Answered:

The first answer was correct, but let me try to put it in simpler
terms.

You buy a 30 year bond at 5%. After a year, you need to sell it for bail or breast enhancement surgery for your girlfriend. Meanwhile interest rates on similar bonds are now 6%.

No one will buy your 5% bond at face value, when they can get a bond just like it yielding 6%, so you have to sell it at a discount. There a complicated formula for calculating the exact discount you need to match a 6% yield with a 5% bond.

Toni Said:

Please help solve Bond Valuation and Preferred Stock Valuation?

We Answered:

a.
(1) Bond L = $1,519 & Bond S = $1,047.6
Both bond trade at a premium because the pay a lot more interest than the market does (i.e. 100/1000 = 10% > 5%)

(2) Bond L = $1,171.2 & Bond S = $1,018.5
Same as (1) but now the premium is less because the market interest (8%) is closer to the bond interest(10%)

(3) Bond L = $863.8 & Bond S = $982.14
Now the bonds trade at a discount because the market rate (12%) is higher than the bond rate (10%).

b.
in fixed income terms, because the duration of bond L is greater than the duration of bond S. In simpler terms, bond L has a greater maturity (15 years vs. 1 year) therefore the more time the bond is outstanding the more copuon payments it will make and the more this coupon deffer from the market rates the more price impact they will have. A bit confusuing, lets try an example, lets assume you have a AAA bond (AAA is the credit rating of the bond, it means it is very secure) that pays you a copon rate of 10% a year and you wanted to sell it the market at this time (right now) you would sell it at premium because none of the AAA bonds out there pay that kind of interest (more like 6% to 7%). Basically, when you buy a bond you buy a stream of cash flows that you are going to receive into the future, if this cash flows are secure, the more deviation they have from market prevailing rates and the more time until maturity they have, the more price impact they will have on the bond price.

2.
$5 / $60 = 8.33% Preferred Stock's required rate of return

Matthew Said:

Valuation of a publicly traded stock or a publicly traded bond. Which is easier to model with reasonings.?

We Answered:

Once upon a time bonds were easier to value than stocks. That of course was before the advent of mortgage backed bonds. And before the rating issued by the bond rating organization came into question as being spurious. And before the insurance issuing agencies screwed up and their bond insurance had become questionable.

Bonds were then valued based on only a few criteria, duration, credit rating, interest coverage, and relation of their return to the risk free return of government bonds, which I might add are perhaps not so risk free any longer.

A publicly traded stock has many more variables that must go into its valuation many of which are completely unknown such as what its projected earnings might be. Thus the valuation process is open to a great deal of uncertainty, moreso than it was once thought that bonds were.

Today there is more uncertainty associated with both, but in general bonds are still considered easier to model.

Darren Said:

Please help solve Bond Evaluation and Preferred Stock Valuation?

We Answered:

Go to this site and plug in your bond parameters. You will see what the effect is on the price of your bond.

http://www.calculatorweb.com/calculators…

preferred stock: 5/60 = 8.3333%