Chapter 6, 13.1 &13.2

Semih Yildirim ADMS 3530

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Chapter 6, 13.1 &13.2Valuing Stocks

Chapter Outline Stocks and the Stock Market Book Values, Liquidation Values, and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks Market Efficiency Corporate Financing: Common Stocks and Preferred

Stocks


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Stocks and the Stock Market• Definitions

Primary Market: Place where the sale of new stock first occurs.

Initial Public Offering (IPO): First offering of stock to the general public.

Seasoned Issue: Sale of new shares by a firm that has already been through an IPO.

Secondary Market: Market in which already issued securities are traded by investors.


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Stocks and the Stock Market• Definitions

Corporations can also raise long term money by issuing and selling securities which are called stocks or shares. Investors who purchase these shares are called stockholders or

shareholders. Issuing stock is like taking on new partners.

Shareholders become part-owners of the issuing firm, electing a board of directors to represent their interests.

The shareholders are entitled to the firm’s residual cash flow. The residual cash flow is the remaining cash flow after all

employees, suppliers, lenders and the government have been paid.

The stockholders, as owners, share in the fortunes of the firm. Shares of stock can be risky investments!


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Stocks and the Stock Market• Dividends

Dividends are periodic cash distributions from the firm to its shareholders. They represent that share of the firm’s profits which are distributed.

Profits can also be retained in the firm and reinvested in its operations: Profits which are kept in the firm are called retained earnings.

If you look at Table 6.2, you will see that different firms have different dividends: Some firms pay no dividends at all!

Dividends, unlike coupon payments, are not fixed -- they represent a share in the profits and profits can go down …

Though you hope that profits, and thus the dividend, will grow with time!


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Stocks and the Stock Market• Dividends

The dividend yield is calculated the same way as the current yield on a bond – divide the annual income by the price of the security:

For Canadian Tire, the dividend is $0.58 on a price of $97.50. Dividend Yield =$0.58/$97.50=0.59% Note that investors will accept low, or zero, current yields if they

can look forward to: Higher future dividends. Rising share prices.

Note also, that like the current yield, the dividend yield calculation ignores potential capital gains or losses. Therefore, like the current yield, it is a poor measure of total

return on your investment.

Dividend Yield = Dividend Payment

Stock Price


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Stocks and the Stock Market• Price-Earnings (P/E) Ratio

The P/E ratio is the price of the stock divided by the earnings per share (eps).P/E Ratio = Stock Price

EPS For the Canadian Tire the P/E multiple is reported as

27.4. The P/E ratio measures how much an investor would

pay for every $1 of eps:For Canadian Tire, investors are willing to pay $27.4

for each $1 of earnings the company generates. Key questions:

Why does one stock sell for more than another?How do we value a stock?


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Book Value, Liquidation Value, and Market Value

• There are three methods used for valuing a company’s shares:• Book value: is the net worth of the firm according to its balance

sheet and records all of the money the firm has raised from selling shares and from retained earnings.

• In Table 6.1, you can see a balance sheet dated January 1, 2005, for Canadian Tire: Molson has $5,218 million in assets. It has liabilities of $2,967.4 million. Book Value = $5,218 - $2,967.4 = $2,251.2 million

• Assume Molson has 81.1 million shares outstanding.• That means the book value per share (bvps) for Molson is:

$2251.2 million / 81.1 million = $27.75 per share• On the same day, its market value per share was $56.21• Investors do not equate book value and market value because they

know that book value is based on the historic cost of the assets.• Historic cost is not a good guide to the value of those assets today.


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Valuing a Stock• Liquidation Value

What if we were to liquidate all of the assets on Canadian Tire’s balance sheet and pay off the liabilities.

Key Question: Would the remaining cash per share

equal the market value for Molson shares? No! A successful company ought to be worth more than

its liquidation value. The difference between liquidation value and market

value may be attributed to what is known as going concern value. A well-managed company is worth more than simples sum of its assets


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Valuing a Stock• Going Concern Value

Going concern value means that a well managed, profitable firm is worth more than the sum of the value of its assets.

ASSET 1

$3 million

ASSET 2

$2 million

ASSET 3

$6 million

Assets sold separately have liquidation value

of $11 million

ASSET 1

$3 million

ASSET 2

$2 million

ASSET 3

$6 million

The same assets functioning as a firm have

going concern value of $15 million


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Valuing a Stock•Sources of Going Concern Value

Extra earning power. If Molson can use its physical assets more efficiently than

a competitor could, then those assets are worth more than their resale value (book value).

Intangible assets. Molson may have extremely valuable assets, such as

brand names, which do not appear on the balance sheet, but are reflected in the market value.

Value of future investments. If Molson shareholders believe that Molson has

opportunities to invest in lucrative projects which will increase the company’s future earnings, they will pay more for the company’s shares today.


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Valuing a Stock• Market Value Book Value or Liquidation Value

Stocks rarely sell at either book value or liquidation value. Unlike market value, book value and liquidation value do not

treat the firm as a going concern. Market value is the amount investors are willing to pay

today for the shares of the firm. This depends on the earning power of the existing assets and

the expected profitability of future investments.

HOW DO WE MEASURE MARKET VALUE?


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Valuing Common Stocks• Expected Return

In Chapter 5, you learned how to calculate the expected return on a security:

Assuming that:The current price of the shares is P0.The expected price a year from now is P1.The expected dividend a year from now is D1.

Expected Return = income + price change

investment

= D1 + P1 – P0

P0


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Note that expected return can be divided into two parts:

Assume that for Blue Sky shares: The current price of the shares is $75. The expected price a year from now is $81. The expected dividend a year from now is $3.

What is Blue Sky’s expected return?

Expected Return = $3 + 81 – 75 = 0.12 = 12%$75

Expected return = Dividend Yield + Capital Gain

= D1 + P1 – P0

P0 P0


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For Blue Sky:

Expected return = Dividend Yield + Capital Gain

= D1 + P1 – P0

P0 P0

= $3 + $81 - $75

$75 $75

= 0.04 + 0.08

= 4% + 8%

= 12%


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Valuing Common Stocks• Expected Return vs Actual Return

Expected return is a forecast of what the return would be if your predictions about the price and the dividend are correct.

However, the actual return on a stock could be more or less than what you expect!

Calculate how well you did as versus the 12% expected return if the following occurs to Blue Sky stock:The actual price a year from now is $61.The actual dividend a year from now is $3.


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Common Stock Valuation• Unlike bonds, valuing common stock is more

difficult. Why?

1. The timing and amount of future cash flows is not known.

2. The life of the investment is essentially forever.

3. There is no way to observe the rate of return that the market requires.


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Common Stock Valuation• Remember: The value today of any financial asset

equals the present value of all of its future cash flows.• As with bonds, the price of the stock is then the present

value of these expected cash flows • One method to determine the price of a share of stock is

to calculate present value of all future dividends. (Dividend Discount Model-DDM)

P0 = Σ [Dt/(1 + r)t]

where t = 1 to ∞

• How many future dividends are there? In principle, there can be an infinite number.

For stocks we can make a simplifying assumption that the firm will pay dividends (cash flows) in perpetuity.


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Common Stock Valuation• To help us value a share of stock, we need to make

some simplifying assumptions about the pattern of future dividends.

• The three cases we consider are:

1. The dividend has a zero growth rate.

2. The dividend grows at a constant rate.

3. The dividend grows at a constant rate after some length of time.


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1. Zero Growth Stocks• A share of common stock in a company with a constant

dividend is much like a share of preferred stock.

• The firm will pay a constant dividend forever

• As such, D1 = D2 = D3 = … = Dt

• Since the dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to D every period.

• Thus, the price can be computed using the perpetuity formula P0 = D1/r


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2. Constant Growth• Suppose we knew that the dividend for some company

always grows at a steady rate (g). • As long as the growth rate (g) is less than the discount

rate (r), the present value of the series of cash flows can be written simply using the growing perpetuity formula:

P0 = Do x (1 + g) = D1

r – g r – gwhere D0 = the most recent dividend paid D1 = the next dividend to be paid


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2. Constant Growth• We can actually use the dividend growth model to get

the stock price at any point in time, not just today. In general, the price of the stock as of time t is:

Pt = Dt x (1 + g) = Dt+1

r – g r – g

• Note: The model only works when the discount rate is greater than the growth rate.


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2. Constant GrowthExample:• ABC Corporation just paid a $2.50 per share dividend to its

common shareholders. An investment in ABC is considered relatively risking and requires a discount rate of 20% per annum. It is forecasted that dividends in ABC are going grow at a rate of 6% per annum indefinitely into the future. How much will an ABC share be worth today? In 10 years?

Step 1: Solve for D0 and D10 D0 = $2.50 D10 = 2.50 x (1 + .06)10 = $4.48

Step 2: Solve for P0 and P10 P0 = (2.50 x 1.06)/(.20 - .06) = $18.93

P10 = (4.48 x 1.06)/(.20 - .06) = $33.92


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3. Non-Constant Growth

• At times, a new company may pay no dividends early in its life but start paying dividends that grow at a constant rate some time in the future.

• At other times, a new company may pay small dividends initially and, at some point in the future, start paying dividends that grow at a constant rate.

• However, as always, the value of the stock is the present value of all future dividends.

• Many cash flow scenarios are possible in this situation.


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3. Non-Constant GrowthExample 1:• ABC Compan’s dividend this year is $1.20 per share and

dividends will grow at10% per year for the next 3 years, followed by 6% annual growth. The appropriate discount rate (required rate of return) for ABC stock is 12%. What is the value of a share of ABC common stock?

D1= 1.32 PV of D1 = 1.1786D2= 1.4520 PV of D2 = 1.1575D3= 1.5972 PV of D3 = 1.1368D4= 1.6930

P3 = D4 / (r-g) = 1.6930/(.12 – .06) = $28.2167P0 = [28.2167(1.12)-3 ] +(1.1786+1.1575+1.1368

=$20.0841 + 3.4730 = $23.5571


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• Example 2• Suppose a firm is expected to increase dividends by 20% in one year

and by 15% in two years. After that dividends will increase at a rate of 5% per year indefinitely. If the last dividend was $1 and the required return is 20%, what is the price of the stock?

• Remember that we have to find the PV of all expected future dividends.

• Compute the dividends until growth levels off D1 = 1(1.2) = $1.20 D2 = 1.20(1.15) = $1.38 D3 = 1.38(1.05) = $1.449

• Find the expected future price P2 = D3 / (R – g) = 1.449 / (.2 - .05) = 9.66

• Find the present value of the expected future cash flows P0 = 1.20 / (1.2) + (1.38 + 9.66) / (1.2)2 = 8.67

3. Non-Constant Growth


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Example• Metallica Bearings, Inc. is a young start-up company. No

dividends will be paid on the stock over the next 5 years. The company will pay a $6 per share dividend in six years and will increase the dividend by 5% per year thereafter. If the required return on this stock is 21%, what is the current share price?

• The current market price of any financial asset is the present value of its future cash flows, discounted at the appropriate required return. In this case, we know that:

D1 = D2 = D3 = D4 = D5 = 0 D6 = $6.00 D7 = $6.00(1.05) = $6.30 . . .


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Solution

• This share of stock represents a stream of cash flows with two important features:

First, because they are expected to grow at a constant rate (once they begin), they are a growing perpetuity;

Second, since the first cash flow is at time 6, the perpetuity is a deferred cash flow stream.

• Therefore, the answer requires two steps:

1. By the constant-growth model, D7/(r - g) = P6;

i.e., P6 = $6.30/(.21 - .05) = $39.378.

2. And, P0 = (P6 +D6)/(1 .21)6 =(39.378+6)/(1 .21)6 = $14.456.


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Valuing Common Stocks•DDM vs Expected Rate of Return

The DDM can be rearranged so that we can calculate the expected rate of return on the stock:

r =D 1

P0

+ g = Dividend Yield + Growth Rate

What is the expected return for Blue Sky if: Next year’s dividend (D1) will be $3. Dividends grow at 8% in perpetuity. The current price is $75.


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Valuing Common Stocks•DDM vs Expected Rate of Return

The expected rate of return on Blue Sky would be:

r =D 1

P0

+ g = Dividend Yield + Growth Rate

=$3

$75+ .08

= .04 + .08 = 4% + 8% = 12%


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Valuing Common Stocks• Calculating “g” (growth rate)

How fast a firm grows depends on how much of its profits are reinvested in operations: The fraction of earnings retained by the firm is

called the plowback ratio.The fraction of earnings a company pays out in

dividends is called the payout ratio. What is Blue Sky’s payout ratio and plowback

ratio if: It has eps of $5. It pays a dividend of $3 and retains the balance.


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Valuing Common Stocks•Calculating “g” (growth rate)

What is the payout ratio? The plowback ratio?

Payout ratio = Dividend/ eps= $3/ $5= 0.60 = 60%

Plowback ratio = 1 – payout ratio= 1 – 0.60 = 0.40 = 40%


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Assume that Blue Sky can earn a 20% return on new equity investments. If all of its earnings were reinvested, Blue Sky

would grow at 20% per year. If all of its earnings were paid out as dividends –

i.e., none of the earnings were reinvested – then Blue Sky would forgo any growth (growth = 0%).

If part of its earnings were reinvested, then Blue Sky would grow at between 0% and 20% per year.

You should see that the higher theplowback rate, the higher the growth rate.


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You can calculate the growth rate for a company by multiplying the return on equity by the plowback ratio:

g = roe x plowback ratio

For Blue Sky, the growth rate would be: g = roe x plowback ratio

= 20% x 40% = 8%

Growth rates calculated this way are known as

Sustainable Growth Rates


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Valuing Common Stocks• Growth Stocks vs Income Stocks

Let’s try a few problems with Blue Sky and see what we can learn about growth and stock value.

In all cases, assume that Blue Sky has: Expected eps of $5 next year. A discount rate of 12%.


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Problem 1: Assume that Blue Sky has: A payout ratio of 100%.

What is the value of Blue Sky stock?

Problem 2: Assume now that Blue Sky has: A payout ratio of 60%.

The roe on new investment is 10%.What is the value of Blue Sky stock?






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Prob. #Plowback

Ratio ROE

g(Sustainable growth rate)

Div1 P0

1 0% * 0.0% $5.00 $41.67

2 40% 10% 4.0% $3.00 $37.50

3 40% 12% 4.8% $3.00 $41.67

4 40% 20% 8.0% $3.00 $75.00

* Since the plowback ratio = 0%, sustainable growth rate willequal 0% regardless of the ROE. Thus, ROE is irrelevant.

You should get the following results:

*


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Valuing Common StocksIn Problem 1 If Blue Sky does not reinvest any of its earnings, then its stock price would be

$41.67.o This price represents the value of earnings from assets which are already in placeIn Problem 2 If Blue Sky invests in projects which generate a return less than its discount

rate, then its stock price would drop to $37.50.o With zero growth, Blue Sky stock was worth $41.67.o The share price is $4.17 lower because of investing in projects with an unattractive rate of

return! Successful financial managers do not invest in projects which earn less than the discount rate – it would reduce the value of the company’s shares!

In Problem 3 If Blue Sky invests in projects with a return equal to its discount rate, then its stock price would be $41.67.

o But, this is the same price as for zero growth …why didn’t growth translate into a higher share price?

• Plowing earnings back into a company does not add value unless investors believe the reinvested earnings will earn more than the discount rate.

In Problem 4 If Blue Sky invests in projects with a return which is greater than its discount rate, then its stock price would rise to $75.

o We know from Problem 1, that $41.67 is the value of the earnings from assets which are already in place.

o Thus, $33.33 ($75 - $41.67) represents the value to investors of the superior return on future investments. This is know as the Present Value Of Growth Opportunities (PVGO)


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The earnings potential of Blue Sky will be reflected in its Price-Earnings ratio.

Blue Sky has expected earnings of $5. With high growth prospects, its price is $75:

Its P/E ratio = P/eps = $75 / $5 = 15x15.0 x With no growth prospects, its price is $41.67:

Its P/E ratio = P/eps = $41.67 / $5 = 8.3X8.3 x Successful financial managers know that to justify a

high P/E ratio on their company’s stock, they must deliver …

… lots of growth opportunities!


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What is an Efficient Market?• Market Efficiency

In efficient capital markets security prices rapidly reflect all relevant information about asset values.

Thus, all securities are fairly priced in light of the information which is available to investors.

If securities are fairly priced, then selling securities at prevailing market terms is never a positive NPV transaction.

Likewise, when buying securities, it is impossible to consistently earn excess profits.


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What is an Efficient Market?• Random Walk

Studies of the market have shown that market prices follow a random walk.

A random walk means that security prices change randomly without predictable trends or patterns.

That is, stock prices seem to wander randomly, just as likely to go up as down, on any particular day, regardless of what has occurred on previous days.

Many studies of the market have shown that studying past price information provides little information about future price changes.

Does the fact that stock prices follow a random walk mean that they are just “plucked out of a hat”?

No, that is not the correct conclusion! What the Random Walk Theory means is this:

If the stock of ABC jumps up today, you cannot assume that it will do the same thing tomorrow.

However, ABC’s price change didn’t just pop out of nowhere! There must have been a good reason for the change in price …

Did they report increased earnings? Or, a new product line which investors expect will boost profits? Or, …


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What is an Efficient Market?• Technical Analysis

Technical analysts are investors who attempt to identify over- or undervalued stocks by searching for patterns in past prices.

However, if stock prices follow a random walk then technical trading rules are useless.

Technical analysis may not work, but technical analysts can help keep the markets efficient!

• Fundamental Analysis Fundamental analysts are investors who attempt to find over- and undervalued

securities by analyzing fundamental information, such as earnings, asset values, and business prospects.

Can fundamental analysts “beat the market” and deliver excess returns to investors?

Researchers have looked at various types of fundamental information – earnings and dividend announcements, plans to issue securities or to merge, and other types of macroeconomic news.

Their conclusions? Market prices already reflect all publicly available information. Thus it is impossible to make superior returns by studying such information.


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Efficient Market Theory• There are 3 forms of the efficient-market theory:

1. Weak form (the random walk theory) Market prices reflect all information contained in past market prices. You can’t make superior profits by studying past stock prices

2. Semi-strong form Market prices reflect all publicly available information. Many researchers have looked at various types of fundamental information

such as earnings and dividend announcements, plans to issue securities or to merge, or other types of macroeconomic news

And found that market prices already reflect all publicly available information. It is impossible to make superior returns by studying such information.

3. Strong form Market prices reflect all known information potentially available to

determine true value. If markets are strong-form efficient, then it is impossible to beat the

market’s performance by studying any kind of information. Your best solution as an investor would be to hold a diversified portfolio of

securities such as an index


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Corporate Financing•The Types of Long-Term Finance

Firms promise to repay their debt, plus interest. If they don’t keep that promise, the debtholders can

force the firm into bankruptcy. No such commitments are made to the equity

holders. They are entitled to whatever is left over after the

debt holders have been paid off. For this reason, equity is called a residual claim on

the firm.


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Common Stock• Equity

Most major corporations are far too large to be owned by one investor. For example, you would need billions of dollars to

purchase BCE. As a consequence, companies like BCE are

owned by many investors, each of whom holds a number of shares of the firm’s common stock.

These investors are known as shareholders or stockholders.


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Common Stock• Terminology• Par Value

The value of the security as shown on the share certificate. The par value was an arbitrary monetary value put on the shares before issue. It was almost always lower than the actual sales price of the new shares.

Canadian companies no longer issue par value shares.• Authorized Share Capital

The maximum number of shares which a company is permitted to issue as specified in the firm’s articles of incorporation.

• Issued Shares The shares that have been issued by the company.

• Outstanding Shares Issued shares which are in the hands of investors.

• Additional Paid-In Capital The difference between the par value and the original selling price of the share. Also called paid-in surplus, capital surplus or contributed surplus.

• Retained Earnings Money plowed back into the company rather than being paid out as dividends.


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Common Stock•Treasury Shares

Sometimes a company repurchases shares it issued in the past from its shareholders.In the US, these shares are recorded on the

Balance Sheet as Treasury Shares. In Canada, repurchased shares must be

cancelled, reducing the company’s net equity by the amount paid for the repurchased shares.


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Common Stock• Book Value vs Market Value

You have already learned that book value is not the same as market value. Book value is a backward-looking measure. It tells you how much capital the firm raised from its shareholders in

the past. Book value is not a measure of the value that investors place on

those shares today. Market value is forward looking.

It depends on the future dividends which shareholders expect to receive.

Market value usually exceeds book value because: Inflation has driven the value of many assets up above their historic

cost. Firms raise capital to invest in projects.

If these projects have a positive NPV, then the value of the firm increases.


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Common Stock•Dividends

Shareholders hope to receive dividends on their investment.However, there is no obligation on the firm to

pay dividends.The decision to pay dividends is up to the Board

of Directors. Because dividends are discretionary, they

are not considered a business expense. Thus companies are not allowed to deduct

dividend payments to calculate taxable income.


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Common Stock• Shareholder Rights

Shareholders own the company and thus, ultimately, they have control of the company’s affairs.

On most matters, shareholders have the right to vote on appointments to the Board of Directors.

On a few matters, the shareholders have a direct say before a company may take action. For example, mergers need shareholder approval.

The Board of Directors are supposed to manage the company in the interests of the shareholders. They are elected as the agents of the shareholders.

They appoint and oversee the management of the firm.


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Common Stock• Voting Procedures

Shareholders control the firm by the vote attached to their common shares.

In most companies, the Directors are elected by a a majority voting system. Shareholders cast one vote for each share they own.

Let’s say there are 5 candidates for the Board. If you owned 100 shares, you would cast in total 500 votes, but to

a maximum of 100 votes for each candidate. Some companies operate a cumulative voting system.

This is a system in which all the votes one shareholder is allowed to cast can be cast for one candidate.

For example, you own 100 shares and there are 5 candidates. Thus you have in total 500 votes. You may cast up to all 500 votes for your favourite candidate.


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Common Stock• Voting Procedures

A cumulative voting system makes it easier for a minority group of shareholders to elect a director to represent their interests.

Thus minority shareholders tend to favour this type of systems as versus a majority voting system.

Shareholders can vote in person or appoint someone else to represent their interests. This is known as appointing a proxy to vote.

In proxy contests, outsiders compete with the firm’s existing managers and directors for control of the company. They do this by requesting the shareholders’ proxies.


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Common Stock• Classes of Stock

Most companies issue just one class of stock. However, some companies have two or more

classes of shares outstanding. They differ in their right to vote and/or to receive dividends. Often these classes of shares will be labelled Class A,

Class B, etc. Common shares without full voting rights are

called restricted shares. There are various types of restricted shares:

Non-voting (nv)shares have no vote at all. Subordinated voting (sv) shares have fewer votes per share

than another class of common shares. Multiple voting (mv)shares carry multiple votes.


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Common Stock• Corporate Governance

The shareholders may own the company, but they usually do not manage it. Generally, management is delegated to a team of professionals.

Though the details of corporate governance vary somewhat, this principal of separation of ownership and control of a firm is found around the world.

In Chapter 2 you learned separation of ownership and control creates potential conflict between the shareholders (owners) and their agents (the managers).

Several mechanisms have evolved to mitigate this conflict: The Board oversees management and can fire them. Management remuneration can be tied to performance. Poorly performing firms may be taken over and the managers

replaced by a new team.


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Preferred Stock• Preferred Equity

Preferred stock takes priority over common stock in regard to dividends. It also ranks ahead of the common shareholders in the distribution of assets if

the firm goes bankrupt. Preferred equity is like debt in that it promises a series of fixed payments

to investors. It is rare for these payments not to be paid in full and on time.

Like common stock, the preferred dividend is paid at the discretion of the Board.

Thus, if there are cash flow problems, the preferred dividend, unlike interest payments, may be skipped.

The only obligation is that no common dividends can be paid if the preferred dividend has not been paid.

The net worth of a company is equal to the book value of its common equity plus preferred stock.

For most companies, preferred stock is much less important than common stock in the firm’s capital structure.

Like common shares, there is more than one type of preferred share available.


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Preferred Stock• Types of Preferred Equity

Cumulative Preferred Shares If the preferred dividend is not paid, it will be in arrears. All such past dividends accrue. In such a situation, a firm may not pay the common dividend until all

preferred dividends in arrears have been paid. Non-Cumulative Preferred Shares

If the preferred dividend is not paid, it does not go into arrears and is lost forever.

Redeemable Preferred Shares A company has the right to repurchase these shares from the shareholders

at a pre-specified price. This price is known as the call price.

Retractable Preferred Shares The investor can force the company to buy back his/her shares at a

specified date. Convertible Preferred Shares

May be converted into another type of security, usually common shares.


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Preferred Stock• Types of Preferred Equity

Floating Rate Preferred SharesMost preferreds, like debt, make fixed

payments. So, like debt, the price of a preferred will

fluctuate with interest rates. Its value falls as interest rates rise and vice versa.

Some preferreds have their dividend linked to interest rates. Any change in interest rates is offset by a change

in the dividend, thus protecting the market value of the investment.

Chapter 6, 13.1 &13.2

Documents

Transcript of Chapter 6, 13.1 &13.2