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Valuation of Financial Assets (Securities)

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long term debt instrument
long term bond that isn't secured by mortgage on a property
Subordinated debenture
a debenture that is subordinated to there debentures in terms of its payments in case of insolvency.
Mortgage Bond
bond backed by fixed assets
Bond issued outside the country in whose currency it is denominated.
Zero coupon bond
No coupon interest payments. The bond holder's return is determined entirely by the price discount.
Junk bond/ High Yield Bonds
any bond rated BB or below
Convertible bond
a debt security that can be converted into a firm's stock at a specified price.
Par Value
the nominal or face value of a stock or bond
Coupon interest rate
the interest rate contractually owed on a bond as a percent of its par value.
the length of time until the bond issuer returns the par value to the bondholder and terminates the bond.
Call provision
a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods.
contract between the issuer of a bond and the bond holders
Book value
value of an asset as shown on a firms's balance sheet; historical cost.
Liquidation value
amount that could be received if and asset were sold individually.
Market value
observed value of an asset in the marketplace; determined by supply and demand.
Intrinsic value
economic or fair value of an asset; the present value of the asset's expected future cash flows.
Yield to maturity
The expected rate of return on a bond. The rate of return investors earn on a bond if they hold it to maturity.
Current yield
is just a quick measure of a bonds annual coupon relative to its market price, or "how much it pays relative to how much it costs.
interest rate risk
the risk that a change in interest rates may affect the net worth of a financial intermediary because of a mismatch in the maturity of its assets and liabilities.
Discount bond
a bond that sells at a discount, or below par value.
Premium bond
A bond that is selling above its par value
callable bond (redeemable bond)
option for a company issuing a bond where they can call (redeem) the bond before it matures;
call protection period
pre-specified time period during which a company cannot recall a bond
fair value
what is the current market value
not sure....
3 bond value relationships
an annuity with infinite life
Constant Growth Perpetuity
a perpetuity that grows at a constant rate forever.
US Treasury Bonds
financial securities issued by the US treasury with maturities of 13 weeks, 26 weeks, or 52 weeks. They are offered with a minimum denomination of $10,000 and in multiples thereafter of $5,000 up to $1 million.
Coupon Payments
series of cash flows offered on bonds
Par Value (face value)
lump-sum amount paid to the holder of a bond at maturity
Periodic payments made off of equities to owners of that equity. Considered long-term securities since they have no maturity date
Capital Gains
the dollar gains that result when a capital asset is sold for more than it costs.
Plowback Ratio
the percentage of the residual cash flow that is retained by the firm for growth purposes.
Characteristics of ordinary shares
The price of ordinary shares today is the present value of all future expected dividends discounted at the "appropriate" required rate of return (or discount rate)
Pricing ordinary shares
the stock price is equal to the sum of the next period's dividend and the expected price discounted at the appropriate required rate of return (ke)
Constant dividend growth model
Implies P0= D1/ ke -g or Pt= Dt/ ke-g
Variable Dividend Growth model
Step 1: Compute the dividends up to the point where g
Preference Shares
These are shares which give their holders preference over ordinary shareholders with regard to payment of dividends (and repayment of capital in case of liquidation)
D1 = αE1
Earnings, Dividends and Prices
Pricing Growth Opportunities
present value of growth opportunities=diff between the growth and no growth prices
Intangible assets examples are
Patents, copyrights, brand names and goodwill
Valuation of Intangible Assets is
recognizing the if the intangible assets are meeting the criteria in the financial reporting. In term of valuating recognition and purchased of an asset ( or all assets).
Recognition criteria
Purchased intangibles
Intangible assets purchased from other party are recorded at cost.
Cost of Purchased Intangibles
The price an entity pays to acquire an intangible asset reflects expectations that the future benefits are probable.
Internally Created Intangibles
Costs that have incurred internally to create intangibles are expensed as incurred (research costs) and therefore are not part of the asset.
AASB 138 'Intangible Assets' states that:
Internally generated intangible assets (except internally generated development expenditure) are not to be carried forward as assets.
Intangible Assets - Measurement Subsequent to Initial Recognition
After the initial recognition of an intangible asset at cost, an entity must choose whether to measure each class of intangible asset using the cost model or the revaluation model (AASB 116)
Cost model
intangible assets are recorded at cost
Revaluation model
Intangible assets can regularly revalued to fair value
Intangible Assets - Revaluation
The accumulated amortisation is rearranged at the time of revaluation.
Amortisation of Intangibles
Finite-life intangibles
Expected residual value of an intangible asset:
The residual value of an intangible asset with finite life is considered to be zero, except:
Accounting Treatment for Intangibles
Intangible assets can be recognised and included in the balance sheet when they fulfil the following characteristic:
Categories of Intangible assets
Marketing - e.g. Trademark
Goodwill arises when one company acquire another company, in which other intangible assets are difficult to identify or measure
Recording Goodwill
are Internally generated goodwill
Internally generated goodwill
should not be capitalised because it does not result in creation of intangible asset that can be reliably measured
Purchased goodwill
is recorded only when an entire business is purchased because goodwill is a 'going concern' valuation and cannot be separated from the business as a whole
Goodwill Write-Off
Acquired goodwill has indefinite life and therefore should not be amortised
Negative Goodwill
Arises when fair value of assets acquired is higher than purchase price
Impairment of Goodwill
Goodwill is required to undertake annual impairment testing.
Restoration of Impairment Loss of Goodwill
Once an impairment loss is recorded, the reduced carrying amount of an asset held for use it becomes its new cost basis.
development activities
Personnel, materials, equipment
Capitalise and amortise over life of intangible
Amortisation of Deferred Development Costs
Amortisation can be based on (whichever is appropriate):
Disclosure of Intangibles
Financial statements are to disclose the following for each class of intangible assets, distinguishing between internally generated and other intangible assets: