Investment Pricing Methods

Preface

Acknowledgments

1 Pricing Concepts and the Term Structure of Interest Rates

Introduction

Present Value Formula

Duration and Other Fixed-Income Pricing Concepts

Concluding Remarks

Notes

Appendix A: Calculation of U.S. Treasury Bond Yield Curve

Appendix B: Eurodollar Futures Yields

2 Fixed-Income Pricing Matrix and Decomposing Yields

Introduction

Determining the Discount Rate

Credit Rating Categories and Determination

Processes for Decomposing Bond Yields

Normalized-Yield Pricing Matrix

Concluding Remarks

Notes

3 Public Corporate Bonds, Private-Placement Bonds, and Whole Commercial Mortgages

Introduction

Key Terminology

Publicly Issued Corporate Bonds

Public Corporate Bond Pricing

Private-Placement Bonds

Valuing a Private-Placement Bond

Pricing Bonds that Have Sinking-Fund Payment Requirements

Pricing Defaulted Bonds

Whole Commercial Mortgage Loans

Valuing a Whole Commercial Mortgage Loan

Monetary Default Scenarios

Notes

Appendix C: Bloomberg-Yield to Call Data

Appendix D: Selected Portions of BondCalc (r) Brochures

4 Mortgage-Backed and Asset-Backed Securities

Introduction

Evolution of the Mortgage-Backed Securities Market

Mortgage-Backed Securities

Collateralized Mortgage Obligations

Bloomberg Median Prepayments

Stripped Securities

Private-Placement Asset-Backed Securities

Concluding Remarks

Notes

5 Privately Held Equity

Introduction

Equity Volatility

Pricing Equity Issues

Common Equity Pricing Models Used by Investment Analysts

Price-Multiple Equity Pricing Models

Discounted Cash Flow Approach Equity Pricing Model

Basic Framework of Private-Equity Investing

Accountant's Review of Private-Equity Valuations

Concluding Remarks

Notes

6 Public Equity Pricing

Introduction

"Fox Rocks" Valuation Illustration

Discounted Cash Flow Model

Concluding Remarks

Notes

Appendix E: "Fox Rocks"

PATRICK CASABONA, PhD, is Associate Professor in the Department of Accounting and Taxation at the Peter J. Tobin College of Business at St. John's University and a consultant to various business organizations.
ROBERT M. TRAFICANTI is Director of Accounting Policy at a major investment bank. He coauthored this book while he was a project manager at the Financial Accounting Standards Board.