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Sunday, March 8, 2009
Bonds Valuation
The formula used for the valuation of bonds is shown below (if coupon payments are paid annually):
where | CP | = | Annual coupon payment |
i | = | Yield to maturity | |
n | = | Number of payments (years) | |
FV | = | Face value (par value) |
If coupon payments are paid semi-annually then:
As for bonds that pay coupon payments quarterly, then just replace 2 in the formula above with 4.
The following table shows some of the yield of bonds with their expected value respectively (assuming coupon payments are paid semiannually):
Coupon Rate | Yield | Par Value | Bond Value |
10% | 8% | 1000 | 1197.93 |
10% | 10% | 1000 | 1000.00 |
10% | 12% | 1000 | 849.54 |
So, the higher the yield for a bond, the lower is the present value of the bond.
Saturday, March 7, 2009
Dividend Cover and Payout Ratio
The dividend cover ratio gives an idea to external parties about the results of operation of a company that might drop leaving the amount of dividends to be paid from the result of the year unchanged or reduced.
Dividend cover ratio that is more than 1.0 (> 1.0) indicates that the ordinary dividends should be paid our for the year.
However, dividend cover ratio that is less then 1.0 (< 1.0) shows that the company is not earning enough profits to pay out as dividends. Therefore, the company is using past retained earnings to fund the dividends payment. This may be a danger sign for potential investors.
The dividend cover ratio is just the opposite of the payout ratio.
Payout ratio that is more than 1.0 (> 1.0) implies that retained earnings are being used to payout as dividends.