Time Influence on Valuation

Question 1

Net Present Value

Answer 1

NPV = PV of Future Cash Flows - Purchase Price.

Question 2

Multi-period Models

Answer 2

Present value, or

PV=CF1/(1+k)1+CF2/(1+k)2+…+CFT/(1+k)T

CF = Cash flow
K - required rate of return
Subscript is the number of years

Question 3

Value of a bond

Answer 3

The value of a bond is equal to the present value of future interest payments plus the present value of par at maturity:

PV bond = Coupon(PVIFAi,n) + Par(PVIFi,n)

Question 4

Promised Yield to Maturity

Answer 4

Let P be the current market price of a bond with a remaining life of n years, and promising cash flows to the investor of C1 in year 1, C2 in year 2, and so on. The promised yield-to-maturity of the bond is the value of y that solves the following equation:

P= c1/(1+y)1 + c2/(1+y)2 + c3/(1+y)3+… + cn/(1+y)n

Question 5

Overpriced or Underpriced

Answer 5

The capitalization method is applied to a bond valuation by comparing the bond’s yield-to-maturity (y) with the appropriate yield-to-maturity (y*) or required rate of return.

If y > y, the bond is undervalued
If y < y, the bond is overvalued
If y = y*, then the bond is said to be fairly priced

Question 6

Intrinsic Value

Answer 6

The inherent value of a bond is called its intrinsic value.