Valuation and Rates of Return (Chapter 10). Valuation of Assets in General Bond Valuation Preferred Stock Valuation Common Stock Valuation. Valuation of Assets in General. The following applies to any financial asset : V = Current value of the asset
V = Current value of the asset
Ct = Expected future cash flow in period (t)
k = Investor’s required rate of return
Note: When analyzing various assets (e.g., bonds, stocks), the formula below is simply modified to fit the particular kind of asset being evaluated.
Pb = Price of the bond
It = Interest payment in period (t)
Pn = Principal payment at maturity (par value)
Y = Bondholders’ required rate of return or
yield to maturity
5 year bond
20 year bond
Yield to Maturity (Y) - Percent
Also Note: If interest rates (Y) go up, bond prices drop, and vice versa. Furthermore, the longer the maturity of the bond, the greater the price change for any given change in interest rates.
Dp = Annual dividend (a constant amount)
kp = Required rate of return