A contingency provision is a clause in a legal agreement that allows for an action if an event or circumstance occurs. The most common contingency provisions for bonds involve the right—but not the obligation—for an issuer or the bondholders to take an action specified in an indenture. Callable Bonds An issuer of a callable bond has…
The most common bond cash flow structure is that of a standard fixed-coupon bond, often referred to as a bullet bond. The bond issuer receives the principal at settlement, makes periodic, fixed coupon payments, and repays the principal at maturity. Most government and corporate issuers use bullet bonds as their primary means of debt financing,…
Bond Indentures A legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders. This legal contract is referred to as the bond indenture. Sources of Repayment The sources of bond repayment vary among issuers and are a key factor in determining a bond’s relative risk. …
Fixed-income instruments are debt instruments, such as loans and bonds. Loans are debt instruments formed and governed by a private agreement usually between an individual or company and a financial intermediary, such as bank. Bonds or fixed-income securities are more standardised contractual agreements between larger issuers and investors. A bond issuer borrows money most often…
Asset-based valuation models are frequently used together with multiplier models to value private companies. As public companies increase reporting or disclosure of fair values, asset-based valuation may be increasingly used to supplement present value and multiplier models of valuation. Important facts that the practitioner should realise are as follows:
In practice, analysts may have difficulty accurately assessing enterprise value if they do not have access to market quotations for the company’s debt. When current market quotations are not available, bond values may be estimated from current quotations for bonds with similar maturity, sector, and credit characteristics. Substituting the book value of debt for the…
The method of comparables is the most widely used approach for analysts reporting valuation judgments on the basis of price multiples. This method essentially compares relative values estimated using multiples or the relative values of multiples. The economic rationale underlying the method of comparables is the law of one price: Identical assets should sell for…
The term price multiple refers to a ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company’s stock. Some practitioners use price ratios as a screening mechanism. If the ratio falls below a specified value, the shares are identified as candidates for…
Multistage growth models are often used to model rapidly growing companies. The two-stage DDM assumes that at some point the company will begin to pay dividends that grow at a constant rate, but prior to that time the company will pay dividends that are growing at a higher rate than can be sustained in the long run.…
The Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase. where g is the constant growth rate. If required return r is assumed to be strictly greater than growth rate g, then the square-bracketed term is an infinite geometric series and sums…