Valuation of Assets in General
         The following applies to any financial asset:
           V = Current value of the asset
           C = Expected future cash flow in period (t)
            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.
                       n    C
                 V          t
                                 t
                      t 1(1 k)
     Valuation of Assets (Continued)
      Determining Intrinsic Value:
      – The intrinsic value of an asset (the perceived 
       value by an individual investor) is determined 
       by discounting all of the future cash flows back 
       to the present at the investor’s required rate of 
       return (i.e., Given the Ct’s and k, calculate V).
      Determining Expected Rate of Return:
      – Find that rate of discount at which the present 
       value of all future cash flows is exactly equal to 
       the current market value. (i.e., Given the Ct’s 
       and V, calculate k).
         Investors’ Required Rates of Return
         (Nominal Risk-Free Rate Plus a Risk Premium)
         Required Return
           20
           18
           16
           14
           12
           10
           8
           6
           4
           2
           0
            0   2   4   6   8   10  12 Risk
                       Bond Valuation
          Pb = Price of the bond
          I = Interest payment in period (t)
           t
                     (Coupon interest)
          Pn = Principal payment at maturity (par value)
          Y = Bondholders’ required rate of return or
                  yield to maturity
          Annual Discounting:
                        n    I         P
                  P         t        n
                   b      (1Y)t    (1Y)n
                       t1
            Bond Valuation (Continued)
         Semiannual Discounting:
          – Divide the annual interest payment by 2
          – Divide the annual required rate of return by 2
          – Multiply the number of years by 2
                 2n   It/ 2     P
             P                n
              b    (1Y/2)t  (1Y/2)2n
                 t1