Module-3
Prof. Rajimol KP, MBA Dept, Atria IT 1
Valuation of Securities: Bond – Meaning,
features, types, determinants of interest
rates, Bond Valuation, Bond Duration, Bond
Management Strategies. Preference Shares-
Concept, Valuation. Equity Shares- Concept,
Valuation, Dividend Valuation Models, P/E
Ratio valuation model. (Theory & Problems).
Prof. Rajimol KP, MBA Dept, Atria IT 2
• In finance, a bond is a type of security under
which the issuer owes the holder a debt, and is
obliged – depending on the terms – to provide
cash flow to the creditor.
• Bonds refer to high-security debt instruments
that enable an entity to raise funds and fulfil
capital requirements. It is a category of debt
that borrowers avail from individual investors
for a specified tenure.
Prof. Rajimol KP, MBA Dept, Atria IT 3
Prof. Rajimol KP, MBA Dept, Atria IT 4
Prof. Rajimol KP, MBA Dept, Atria IT 5
Prof. Rajimol KP, MBA Dept, Atria IT 6
Corporate Bond
Government Bond
Fixed rate Bond
Floating Rate Bond
Zero Coupon Bond
Callable Bond
Convertible Bond
Participating Bond
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Prof. Rajimol KP, MBA Dept, Atria IT 8
Bond Returns
• Holding Period Return
• Current Yield
• Yield to maturity
Prof. Rajimol KP, MBA Dept, Atria IT 9
Bond Management Strategies
• Active strategies
• Passive strategies
• Hybrid strategies
Prof. Rajimol KP, MBA Dept, Atria IT 10
Bond Valuation
• A technique for determining the fair value of a particular bond. Bond valuation includes
calculating the present value of the bond's future interest payments, also known as its cash
flow, and the bond's value upon maturity, also known as its face value or par value.
• The valuation process involves the following three steps:
1. Estimate the expected cash flows.
2. Determine the appropriate interest rate or interest rates that should be used to discount the cash
flows.
3. Calculate the present value of the expected cash flows found in step one by using the interest rate or
interest rates determined in step two.
Prof. Rajimol KP, MBA Dept, Atria IT 11
Bond Duration
• The duration of a bond that consists of fixed cash flows, such as a
bond, is the weighted average of the times until those fixed cash flows
are received.
• Duration measures a bond's or fixed income portfolio's price
sensitivity to interest rate changes.
Prof. Rajimol KP, MBA Dept, Atria IT 12
Prof. Rajimol KP, MBA Dept, Atria IT 13
THE TERM STRUCTURE OF INTEREST RATES
• For a given bond issuer, the structure of yield for bonds with different terms of maturity is called the 'term
structure of interest rates'. The term structure of interest rate', or 'yield curve', as it is called, may be defined as
the relationship between yields and maturities of bonds in given default risk classes.
• There are three theories about how the shape of yield curve is determined.
• The Liquidity Preference Theory
• Expectations Theory
• Market Segmentation Theory
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Prof. Rajimol KP, MBA Dept, Atria IT 15
Prof. Rajimol KP, MBA Dept, Atria IT 16
Prof. Rajimol KP, MBA Dept, Atria IT 17
Prof. Rajimol KP, MBA Dept, Atria IT 18
Prof. Rajimol KP, MBA Dept, Atria IT 19
Prof. Rajimol KP, MBA Dept, Atria IT 20
Prof. Rajimol KP, MBA Dept, Atria IT 21
Types of Equity Valuation Models
1. Single year Holding Valuation
2. Multiple Year Holding Valuation
3. Zero Growth
4. Constant Growth
5. Two Stage Model
6. Three Stage Model
7. Capital Asset Pricing Model (CAPM)
Prof. Rajimol KP, MBA Dept, Atria IT 22
