Focus on bond and stock valuation problems and questions.

Introduction

In this assessment, the emphasis is on calculating the value of bonds and stocks. You will learn about the common features of bonds and learn to differentiate among the types of bonds. The focus then shifts to the mathematics of bond valuation (bond valuation model using the TVM concept). You will also learn about the factors that affect a bond’s price and the relationship between changes in interest rates and bond prices.

In addition to learning about bonds, explore the various components of stock returns, common stock valuation models (such as constant dividend growth and variable growth), the use of the price/earnings (P/E) ratio, and preferred stocks valuation.

Preparation

This assessment focuses on the TVM concept and how it relates to bond and stock valuations. An understanding of bond characteristics and of bond cash flows is necessary in order to understand the time value of money effects on bonds and their valuation. Accordingly, it is recommended you employ your knowledge of time value of money principles. You also need to thoroughly read and understand the Principles of Finance text, Chapter 10, “Bonds and Bond Valuation,” before reviewing the problems and solutions provided in the Bond Valuation Example tab in the assignment template. It is also highly recommended you first read and study the Principles of Finance text, Chapter 11, “Stocks and Stock Valuation,” before reviewing the problems and solutions provided in the Stock Valuation Examples tab in the assessment template. One must understand the TVM theory before being able to solve the valuation problems.

Instructions

Complete and submit the Assessment 3 Template [XLSX] Download Assessment 3 Template [XLSX].

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

Competency 1: Analyze financial environments and concepts.

Explain what a call provision (call feature) allows (bond) issuers to do.

Explain why the S&P 500 Index might be a better measure of stock market performance than the Dow Jones Industrial Average.

Competency 2: Apply financial computations and processes.

Calculate five bond valuation problems correctly.

Calculate five stock valuation problems correctly.

Competency 3: Communicate effectively and professionally.

Convey clear meaning through appropriate word choice and usage.

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