Insider information can be illegal depending how I t is used. . Insiders can trade stock of their companies. However, he cannot exploit inside information first. Market efficiency does not mean stock market prices are exactly correct- just helps judge if price is too high or too low.  Goal is to just match the market- match a major index. This is the best that can be done in market efficiency.

Chapter 10- Day 1

Bond Valuation

Hi (p/e) (growth)                                                                                             Lo (p/e) (Value)

1,000 Face Value = Principal

8% Coupon= Interest Paid

3 Years to Maturity

 

 Annual Interest Payment- Every year there is an interest payment=coupon payment=coupon rate * face value

                                                                                                                   = 8% *1000=80

                                                                                                                     80/2= $40 dollar payment

-          6 payment periods  ( three years semi-annual)

·         Always assume semiannual coupon payment*

 

 

                40           40           40           40           40   40   

l-----------l----------l-------l---------l----------l--------l

                                                                                         1000

I= 6% (market rate)

 

Price = 40/(1+.06/2) ^1+ 40/(1+.03)^2……… 40+1000/(1.03)^6

=1054.17

 

Single Cash Flow                                                                                               Per Period

PVß price                                                                                                          NPER

FVß Cash Flow at the end of investment                                             Rate ( market interest Rate)

                                                                                                                                PMT ( Per Period)

 

PV-0                                                                                                                                      NPER-6

 

FV=-1,000                                                                                                                            Rate- 6%/2=3%

                                                                                                                               

                                                                                                                                                PMT-40

 

 

Finding PV in excel

1-      Go to the formula Tab on the upper left hand corner of the screen

2-      Beneath the function tab the selection a button labeled “ Financial” will be right beneath this.

3-      Click “ Financial” and look for “ PV” tab

4-      If you right click on “ PV” A box will pop up with the following box with this information needed to be plugged in

Rate-

NPR-

Payment-

FV-

                Once you plug this information in- an equation is now computable.