| Bond | Company/ | Face Value (FV) | Coupon Rate (%) | Annual Payment (PMT) | Time-to Maturity (NPER) | Yield-to-Maturity (RATE) | Market Value (Quote) | Discount, Premium, Par |
| Rating | ||||||||
| A-Rated | Goldman Sachs Group Inc. MTN | $1,000 | 5.500% | $55 | 10 | 3.36% | 955.5 | Premium |
| B-Rated | Northwestern Bell Tel | $1,000 | 7.75% | $77.50 | 10 | 4.78% | 1046 | Premium |
| C-Rated | Petroleos De Venezuela | $1,000 | 9.75% | $97.50 | 20 | 17.75% | 681 | Discount |
Bond rating refers to the evaluation of the security in making a bond investment, a process that is done by a recognized financial organization (Higgins, 2012). On the other hand, the internal percentage of yield when a bond is retained to maturity is referred to as the yield to maturity. The relationship between ratings and yield to maturity is inverse as low bond ratings correspond with high yield to maturity and vice versa.
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The coupon rate refers to the rate of interest on coupons stemming from bonds, hence multiplying the bond’s par value by the coupon rate gives the annual interest (Higgins, 2012). In determining why the bonds would trade at a discount, premium, or par, the explanation lies in the relationship between both the coupon rate and yield to maturity against the bond prices. Notably, coupon rate and yield to maturity relate inversely with the bond prices. As a result, low rates lead to high bond prices while high rates imply low bond prices.
Increasing the time to maturity by 5 years would cause an increase in yield to maturity while effectively diminishing the bond’s market price. On the other hand, decreasing the time to maturity by 5 years would decrease the yield to maturity while increasing the bond’s market price.
Stocks – Gordon Model
Company | 5-year Risk-Free Rate of Return | Beta (β) | 5-Year Return on Top 500 Stocks | Required Rate of Return (CAPM) |
| Walmart Inc. | 1.17% | 0.19 | 12% | 2.28% |
| The Kroger Co. | 1.17% | 0.69 | 12% | 8.28% |
| Costco Wholesale Corporation | 1.17% | 1.07 | 12% | 12.84% |
Company | Current Dividend | Projected Growth Rate (next year) | Required Rate of Return (CAPM) | Estimated Stock Price (Gordon Model) | Current Stock Price | Over/Under Priced |
| Walmart Inc. | 2.02 | 3.23% | 2.28% | 36.61 | 25.66 | under |
| The Kroger Co. | 0.49 | 14.78% | 8.28% | 11.38 | 9.49 | over |
| Costco Wholesale Corporation | 1.07 | 2.54% | 12.84% | 30.44 | 23.83 | under |
Through application of the Gordon Model, it becomes possible to determine the cost of equity. In the Gordon Model, the required rate of return on asset is obtained by dividing the ensuing period dividends by the existing stock rate and adding the expected growth rate (Editorial Board, 2014). The Gordon Model’s strengths include its simple and easily understood concept as well as its suitability for corporations with a continual growth rate or big organizations ("Strengths and weaknesses”, 2015). On the other hand, its weaknesses include the inability to apply it with corporations that are not disbursing dividends as well as its reliance on a continual rate of growth in the company.
Price-to-earnings model
Company | Estimated Earning | P/E Ratio | Estimated Stock Price (P/E) | Current Stock Price | Over/Under Priced |
(next year) | |||||
| Walmart Inc. | 2.02 | 20.73 | 41.46 | 25.66 | under |
| The Kroger Co. | 0.5 | 13.58 | 6.79 | 9.49 | over |
| Costco Wholesale Corporation | 1.15 | 25.23 | 29.0145 | 23.83 | under |
The price-to-earnings (P/E) ratio, aids investors in determining whether the prevailing stock prices are over or under priced in comparison to estimated prices. In this method of estimating the stock values, the price-to-earnings ratio is multiplied by the estimated earnings to demonstrate the stock prices standing in relation to existing market price. Since the P/E ratio does not require the dividend payments, it appears more accurate in estimating stock prices.
References
Editorial Board. (2014). Financial management . (1 ed.). Words of wisdom, llc. Retrieved from http://wow.coursesmart.com/9781934920855
Higgins, R. C. (2012). Analysis for financial management . (10th ed.). New York, NY: McGraw- Hill Irwin. Retrieved from http://wow.coursesmart.com/0078048567
Strengths and weaknesses of the Gordon growth model . (2015). Retrieved from http://financial-education.com/2007/08/14/strengths-and-weaknesses-of-the-gordon-growth-model/
S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source =;
Yahoo! Finance. (n.d.). Retrieved from http://finance.yahoo.com/
