-
- Value of any security can be defined as the present value of the future cash streams i.e., the intrinsic value of an asset should be equated to the present value of the benefits associated with it.
- Book value is an accounting concept. Assets are recorded at historical costs and they are depreciatedd over years. Book value includes intangible assets at acquisition cost minus amortized value. The book value of debt is stated at the outstanding amount. The difference between the book value of assets and liabilities is equal to shareholder's funds or net worth (which is equal to paid-up equity capital plus reserves and surplus).
- Replacement value is the amount that a company would be required to spend if it were to replace its existing assets in the current condition.
- Liquidation value is the amount that a company could realize if it sells its business as an operating one. Its value would always be higher than the liquidation value, the difference accounting for the usefulness of assets and value of intangibles.
- Market value of an asset or security is the current price at which the asset or the security is being sold or bought in the market.
- Face Value: This is the value stated on the face of the bond and is also known as par value. It represents the amount of borrowings by the firm which it specifies to repay after a specific period of time i.e., at the time of maturity. A bond is generally issued at face value or par value which is usually Rs.100 and may sometimes be Rs.1,000.
- Coupon Rate or Interest: A bond carries a specific rate of interest which is also called as the coupon rate. The interest payable is simply the Par Value of the Bond x Coupon Rate. Interest paid on a bond is tax deductible for the issuer.
- Maturity: A bond is issued for a specific period of time. It is repaid on maturity. Typically corporate bonds have a maturity period of 7-10 years whereas government bonds have a maturity period up to 20-25 years.
- Redemption Value: The value which a bondholder gets on maturity is called redemption value. A bond may be redeemed at par, at premium (more than par value) or at discount (less than par value).
- Market Value: A bond may be traded in a stock exchange. Market value is the price at which the bond is usually bought or sold in the market. Market value may be different from par value or redemption value.
- One Period Rate of Return: If a bond is purchased and then sold one year later, its rate of return over this single holdings period can be defined as rate of return.
- Current yield measures the rate of return earned on a bond if it is purchased at its current market price and if the coupon interest is received.
- Coupon rate and current yield are two different measures. Coupon rate and current yield will be equal if the bond's market price equals its face value.
- Yield-To-Maturity(YTM): It is the rate of return earned by aan investor who purchases a bond and holds it till maturity. The YTM is the discount rate which equals the present value of promised cash flows to the current market price/purchase price.
- Based on the bond valuation model, several bond value theorems have been derived which state the effect of the following factors on bond values: (i) Relationship between the required rate of return and the coupon rate (ii) Number of years to maturity (iii) Yield-To-Maturity.
- A bond's price is inversely proportional to its yield to maturity.
- For a given difference between YTM and coupon rate of the bonds, the longer the term to maturity, the greater will be the change in price with change in YTM.
- Given the maturity, the change in bond price will be greater with a decrease in the bond's YTM than the change in bond price with an equal increase in the bond's YTM.
- For any given change in YTM, the percentage price change in case of bonds of high coupon rate will be smaller than in the case of bonds of low coupon rate, other things remaining the same.
- The exercise price of a warrant is what the holder must pay to purchase the stated number of shares.
- According to the dividends capitalization approach, which is a conceptually sound approach, the value of an equity share is the discounted present value of dividends received plus the present value of the resale price expected when the equity share is sold.