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What Is The Major Reason For P/E Expansion and Contraction Historically?

This document discusses various concepts related to bonds and bond valuation including: 1) The dividend discount model and how the discount rate should be in line with cash flows. Key assumptions of the sustainable growth rate model are also outlined. 2) Different types of bonds are defined such as mortgage-backed securities, inverse floatation bonds, foreign currency convertible bonds, and dual currency bonds. Yield calculations for bonds like yield to call and yield to worst are also covered. 3) Additional bond topics discussed include the relationship between bond prices and yields, the fisher effect, factors affecting the yield curve, and bond portfolio strategies around duration matching and laddering.

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Vijesh Mv
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77 views

What Is The Major Reason For P/E Expansion and Contraction Historically?

This document discusses various concepts related to bonds and bond valuation including: 1) The dividend discount model and how the discount rate should be in line with cash flows. Key assumptions of the sustainable growth rate model are also outlined. 2) Different types of bonds are defined such as mortgage-backed securities, inverse floatation bonds, foreign currency convertible bonds, and dual currency bonds. Yield calculations for bonds like yield to call and yield to worst are also covered. 3) Additional bond topics discussed include the relationship between bond prices and yields, the fisher effect, factors affecting the yield curve, and bond portfolio strategies around duration matching and laddering.

Uploaded by

Vijesh Mv
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Dividend discount model

Discount rate should be in line with cash flow.


Dividend is a cash flow for equity share holders so cost of equity
Cash flow interest=cost of debt.
Cash flow for company(FCFF)=WACC
COST OF DEBT =WACC=ZERO DEBT.
R=cost of equity
B=bloughback ratio.
RR*ROE=sustainable growth rate (SGR)
Assumptions of SGR Model.

Whatever the company had been retaining historically will continue to retain.
Whatever they had retained is assumed to be reinvested into growth assets.
Whatever they are expected to reinvested is expected to fetch the same ROE as
historically getting.

Assumption is that company will not diversify or get into different business.
Company may not be investing in the same assets.
What is the major reason for P/E expansion and contraction historically?
Applicable (When to use)
Matured.
Some reinvestment rate.
Determinants of (P/E)
H MODEL
Very rarely companies follow.
Expecting companies to reduce their dividend to exactly half in certain no of years.
Carry tradeActive trading across the world-Return-arbitrage-risk free rate.
Borrow from Japan, invest in USA.
Active bond market-Primary and secondary market is active.
Unilateral transactions in current account-Before 1991 current account was not
convertible.
Now-current account is freely transferable.
Capital account convertible nation.
Mortgage backed security-Relevant for banks-relevant because risk is transferred.
Cashflow of an MBS-Intrest,principal(Hold cashflow)
Fixed rate vs floating rate bond.
Protection from fixed rate and floating rate risk.
Introduced in US by Morgan Stanley and In India by Cholamandalam Finance.

Inverse floatation bond.


CCPS-Venture capital side-Cumulative convertible preference shares.
Compulsory Cumulative convertible preference shares.
Optional Cumulative convertible preference shares.
For a start up-difficult to pay dividend
FCCB-Foreign Currency Convertible Bond.
Dual currency bond- Investment in one currency and principal in another currency.
Yield to call-Compulsory for calculation of any bond having call option.-Issuer.
Yield to put-HolderYTW-Yield to worst.-Lowest yield in case of multiple bonds.
Realised yield to maturity
IDBI and ICICI tax saving bonds-Invest and forget (Reinvestment is done by
company) or invest and get regular return.
Bond price and yield inverse relationship.
Fisher effect.
Shorter the time period higher intrest rates and vice versa.
Negative yield
GLASS-STEAGEL ACT-Role of investment banks,difference b/w investment banks and
commercial banks.Should be there.?
GRAHAM-LEECH BLYLE ACT-Uniform financial services
DODFRANK ACT
Subprime customers.
Factors affecting yield curve.
Active/Passive bond portfolio management strategies.
Biggest risk in investing in bond-Interest rates fluctuation and price
risk.,REINVESTMENT RISK
When price goes up interest comes down and vice versa.
Reinvestment risk.
Yield curve on multiple yields(countries)
MACAULEY DURATION
DURATION MATCHING STRATEGY
WEIGHTED AVERGAGE MATURITY OF CASHFLOWS
Yield curve is rising/falling.
Monetary policy has huge influence on shorter end of yield curve.
Bill gross-best bond market manager
Portfolio shifts-Pref. for long term vs short term maturities.

Bond ladder strategy.-educational funds


Business model-numbers
Basis of your decision
Stock market investment-knowledge and time
SIP

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