Bond Market Overview and Bond Pricing

Size: px
Start display at page:

Download "Bond Market Overview and Bond Pricing"

Transcription

1 Bond Market Overview and Bond Pricing. Overview of Bond Market 2. Basics of Bond Pricing 3. Complications 4. Pricing Floater and Inverse Floater 5. Pricing Quotes and Accrued Interest

2 What is A Bond? Bond: a debt instrument requiring the issuer (debtor) to repay to lender/investor the amount borrowed plus interest over a specified period of time Plain vanilla bonds Advanced debt contract mortgage pass-through securities 2

3 Most Generic Classification Government bonds low/no risk, low yield, low expected returns -- return is high when yield goes down Risky bonds non-government bonds, including corporate bonds, municipal bonds, mortgage securities (subprime market securities) 3

4 Sectors of US Bond Market Treasury Sector have you heard of saving bonds? Agency Sector Municipal Sector Corporate Sector Asset-Backed Security Sector Mortgage Sector See: 4

5 More Info of Bonds Federal Reserve Flow of Funds report: TRACE: ettransparency/trace/ Mergent FISD: 5

6 6

7 . Different Characteristics Stocks vs. Bonds 2. Different Markets Stocks: traded on exchanges and OTC markets: NYSE, AMEX, NASDAQ Bonds: traded on OTC markets 3. Similarity: Buy stocks and bonds through online traders. 7

8 Returns of Aggregate Stocks, Gov Bonds, Corporate Bonds Returns Year ret_stock ret_gov ret_credit 8

9 Overview of Bond Features Term to maturity Coupon rate Fixed rate bonds Floating rate bonds Reference rate quoted margin Principal/Face Value Interest rate/yield to maturity Price 9

10 Example of a fixed payment bond 0 years, face value $000, coupon rate 8%, semi-annually paid, interest rate 9%. What is the bond price? There are many variations in bond designs: () deferred-coupon (2) amortizing securities: securities with a schedule of periodical principle repayments. (3) options could be embedded (page 6) 0

11 FV versus PV Future Value: P n = P 0 (r) n Present Value: P 0 = P n /(r) n Future value for a regular annuity Present value for a regular annuity

12 Examples. Cash flow (): you receive $00 in year, $200 in year 2, $300 in year 3. Interest rate is 9%. What is the value of the cash flow? 2. Cash flow: you need to pay $00 in year, $200 in year 2, and $300 in year 3. Interest rate is 9%. How much you need invest today to pay for this loan? 3. Coupon Bond: 2 years, face value $000, coupon rate $8, semi-annually paid, interest rate 9%. What is the bond price? Using your financial calculator 2

13 Zero-coupon bonds Price of zero-coupon bond: P 0 = M/(r) n Example 3

14 Complications If the next payment is due in fewer than 6 months Cash flows may not be known What is the appropriate required yield and whether one discount rate can be applied to all cash flows 4

15 5 Next Due Payment < 6 months = = n t n t r r M r r C P ) ( ) ( ) ( ) ( ν ν month period days in six - and next coupon days between settlement = ν In fact, this is a 3-step approach to calculate bond price. () In the first step, we compute bond price if I buy the bond in the next payment date (i.e., I won t get any payment for it): = = ) ( ) ( n t n t r M r C P (2) Add in the payment I receive in the next payment date, then = = = = n t n t n t n t r M r C r M r C C P ) ( ) ( ) ( ) ( (3) Discount the above price back to the date I purchase the bond. The idea is to suppose I buy the bond right before the next payment day, thus I can have the next payment, then discount the value back to time 0.

16 Price Quoted and Accrued Interest Price quoted: 00: meaning 00% of its par value/face value Accrued interest: when an investor purchases a bond between coupon payments, the investor must compensate the seller of the bond for the coupon interest earned from the time of the last coupon payment to the settlement date of the bond. for a treasury bond, accrued interest is based on the actual number of days the bond is held by the seller. Full price/dirty price = price accrued interest Clean price 6

17 Example A bond face value $000, YTM=5%, coupon rate=6% semiannually paid, maturity=5 years. The bond was issued on 7//2003, and bought on //2005. What is price of the bond. v=? n=? 7

18 Procedures of computing price Step Step 2 Step 3 8

19 Example (cont d) What is the accrued interest of the bond? What is the dirty price of the bond? 9

20 Floater and Inverse Floater See Exhibit 2-4. Inverse s price = collateral s price floater price Collateral is the fixed-rate security from which the inverse floater is created Floor: the minimum interest rate on the inverse floater Cap: the maximum interest rate on the floater The sum of interests paid on floater and inverse floater must always equal interests on the collateral. 20

21 Risk Associated with Bonds. Interest-rate risk 2. Reinvestment risk 3. Call risk 4. Credit risk 5. Inflation risk 6. Exchange-rate risk 7. Liquidity risk institutional investor must trade frequently in some extent 8. Risk risk 2

ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

More information

Click Here to Buy the Tutorial

Click Here to Buy the Tutorial FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

More information

Fixed Income: Practice Problems with Solutions

Fixed Income: Practice Problems with Solutions Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield to maturity should

More information

Bonds and Yield to Maturity

Bonds and Yield to Maturity Bonds and Yield to Maturity Bonds A bond is a debt instrument requiring the issuer to repay to the lender/investor the amount borrowed (par or face value) plus interest over a specified period of time.

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean

More information

LOS 56.a: Explain steps in the bond valuation process.

LOS 56.a: Explain steps in the bond valuation process. The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

More information

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value Bond valuation A reading prepared by Pamela Peterson Drake O U T L I N E 1. Valuation of long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations

More information

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy? 1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

More information

Chapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship

More information

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23. Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

More information

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions. Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation and Bond Valuation 1 Bonds Debt Instrument Bondholders are lending the corporation money for some stated period of time. Liquid Asset Corporate Bonds can be traded in the secondary market. Price at which

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial

More information

Goals. Bonds: Fixed Income Securities. Two Parts. Bond Returns

Goals. Bonds: Fixed Income Securities. Two Parts. Bond Returns Goals Bonds: Fixed Income Securities History Features and structure Bond ratings Economics 71a: Spring 2007 Mayo chapter 12 Lecture notes 4.3 Bond Returns Two Parts Interest and capital gains Stock comparison:

More information

20. Investments 4: Bond Basics

20. Investments 4: Bond Basics 20. Investments 4: Bond Basics Introduction The purpose of an investment portfolio is to help individuals and families meet their financial goals. These goals differ from person to person and change over

More information

Bond valuation and bond yields

Bond valuation and bond yields RELEVANT TO ACCA QUALIFICATION PAPER P4 AND PERFORMANCE OBJECTIVES 15 AND 16 Bond valuation and bond yields Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:

More information

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

More information

Mortgage loans and mortgage-backed securities

Mortgage loans and mortgage-backed securities Mortgage loans and mortgage-backed securities Mortgages A mortgage loan is a loan secured by the collateral of some specific real estate property which obliges the borrower to make a predetermined series

More information

Chapter 5: Valuing Bonds

Chapter 5: Valuing Bonds FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

More information

Chapter 4 Bonds and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 4 Bonds and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS Chapter 4 Bonds and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS 4-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as government

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

NATIONAL STOCK EXCHANGE OF INDIA LIMITED NATIONAL STOCK EXCHANGE OF INDIA LIMITED Capital Market FAQ on Corporate Bond Date : September 29, 2011 1. What are securities? Securities are financial instruments that represent a creditor relationship

More information

Bonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University

Bonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University

More information

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved.

2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved. 2 The Mathematics of Finance Copyright Cengage Learning. All rights reserved. 2.3 Annuities, Loans, and Bonds Copyright Cengage Learning. All rights reserved. Annuities, Loans, and Bonds A typical defined-contribution

More information

Exam 1 Morning Session

Exam 1 Morning Session 91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

More information

Index. 1. Financial Markets: Overview. 2. The Bond Market. 3. Risks Associated with Fixed Income Investments. 4. Bond Characteristics and Valuation

Index. 1. Financial Markets: Overview. 2. The Bond Market. 3. Risks Associated with Fixed Income Investments. 4. Bond Characteristics and Valuation Index 1. Financial Markets: Overview 2. The Bond Market 3. Risks Associated with Fixed Income Investments 4. Bond Characteristics and Valuation 5. Macro Environment Chapter 24 Bond Characteristics and

More information

CHAPTER 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA

CHAPTER 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA CHAPTER 9 DEBT SECURITIES by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA LEARNING OUTCOMES After completing this chapter, you should be able to do the following: a Identify issuers of debt securities;

More information

INTERACTIVE BROKERS DISCLOSURE STATEMENT FOR BOND TRADING

INTERACTIVE BROKERS DISCLOSURE STATEMENT FOR BOND TRADING INTERACTIVE BROKERS DISCLOSURE STATEMENT FOR BOND TRADING THIS DISCLOSURE STATEMENT DISCUSSES THE CHARACTERISTICS AND RISKS OF TRADING BONDS THROUGH INTERACTIVE BROKERS (IB). BEFORE TRADING BONDS YOU SHOULD

More information

Floating-Rate Securities

Floating-Rate Securities Floating-Rate Securities A floating-rate security, or floater, is a debt security whose coupon rate is reset at designated dates and is based on the value of a designated reference rate. - Handbook of

More information

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

More information

Bond Valuation. What is a bond?

Bond Valuation. What is a bond? Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

More information

Asset Valuation Debt Investments: Analysis and Valuation

Asset Valuation Debt Investments: Analysis and Valuation Asset Valuation Debt Investments: Analysis and Valuation Joel M. Shulman, Ph.D, CFA Study Session # 15 Level I CFA CANDIDATE READINGS: Fixed Income Analysis for the Chartered Financial Analyst Program:

More information

American Options and Callable Bonds

American Options and Callable Bonds American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

More information

3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction.

3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction. Spring 2012 Finance 3130 Sample Exam 1A Questions for Review 1. The form of organization for a business is an important issue, as this decision has very significant effect on the income and wealth of the

More information

Mathematics. Rosella Castellano. Rome, University of Tor Vergata

Mathematics. Rosella Castellano. Rome, University of Tor Vergata and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings

More information

January 2008. Bonds. An introduction to bond basics

January 2008. Bonds. An introduction to bond basics January 2008 Bonds An introduction to bond basics The information contained in this publication is for general information purposes only and is not intended by the Investment Industry Association of Canada

More information

Chapter 4 Valuing Bonds

Chapter 4 Valuing Bonds Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than

More information

2. Determine the appropriate discount rate based on the risk of the security

2. Determine the appropriate discount rate based on the risk of the security Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the

More information

Exercise 1 for Time Value of Money

Exercise 1 for Time Value of Money Exercise 1 for Time Value of Money MULTIPLE CHOICE 1. Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are useful for visualizing

More information

Math of Finance. Texas Association of Counties January 2014

Math of Finance. Texas Association of Counties January 2014 Math of Finance Texas Association of Counties January 2014 Money Market Securities Sample Treasury Bill Quote*: N Bid Ask Ask Yld 126 4.86 4.85 5.00 *(Yields do not reflect current market conditions) Bank

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Excel Financial Functions

Excel Financial Functions Excel Financial Functions PV() Effect() Nominal() FV() PMT() Payment Amortization Table Payment Array Table NPer() Rate() NPV() IRR() MIRR() Yield() Price() Accrint() Future Value How much will your money

More information

Bond Valuation. Capital Budgeting and Corporate Objectives

Bond Valuation. Capital Budgeting and Corporate Objectives Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond marketsĀ» What

More information

Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview

Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation

More information

Finding the Payment $20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = $488.26

Finding the Payment $20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = $488.26 Quick Quiz: Part 2 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive $5,000 per month in retirement.

More information

This is Interest Rates and Bond Valuation, chapter 9 from the book Finance for Managers (index.html) (v. 0.1).

This is Interest Rates and Bond Valuation, chapter 9 from the book Finance for Managers (index.html) (v. 0.1). This is Interest Rates and Bond Valuation, chapter 9 from the book Finance for Managers (index.html) (v. 0.1). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/

More information

- Short term notes (bonds) Maturities of 1-4 years - Medium-term notes/bonds Maturities of 5-10 years - Long-term bonds Maturities of 10-30 years

- Short term notes (bonds) Maturities of 1-4 years - Medium-term notes/bonds Maturities of 5-10 years - Long-term bonds Maturities of 10-30 years Contents 1. What Is A Bond? 2. Who Issues Bonds? Government Bonds Corporate Bonds 3. Basic Terms of Bonds Maturity Types of Coupon (Fixed, Floating, Zero Coupon) Redemption Seniority Price Yield The Relation

More information

Glossary of Common Derivatives Terms

Glossary of Common Derivatives Terms DRAFT: 10/03/07 Glossary of Common Derivatives Terms American Depository Receipts (ADRs). ADRs are receipts issued by a U.S. bank or trust company evidencing its ownership of underlying foreign securities.

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems covering chapter 1, 2, 3, 4, 14, 16. Questions in the multiple choice section will

More information

Chapter 3. How Securities are Traded

Chapter 3. How Securities are Traded Chapter 3 How Securities are Traded Primary vs. Secondary Security Sales Primary: When firms need to raise capital, they may choose to sell (or float) new securities. These new issues typically are marketed

More information

Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,

Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets, FIN 472 Professor Robert Hauswald Fixed-Income Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the

More information

Chapter 10. Fixed Income Markets. Fixed-Income Securities

Chapter 10. Fixed Income Markets. Fixed-Income Securities Chapter 10 Fixed-Income Securities Bond: Tradable security that promises to make a pre-specified series of payments over time. Straight bond makes fixed coupon and principal payment. Bonds are traded mainly

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

More information

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS

Module 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS 1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 Short-Term Debt (Short-Term Loans, Line of

More information

FIXED-INCOME SECURITIES. Chapter 10. Swaps

FIXED-INCOME SECURITIES. Chapter 10. Swaps FIXED-INCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange

More information

Fin 3312 Sample Exam 1 Questions

Fin 3312 Sample Exam 1 Questions Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might

More information

FIN 472 Fixed-Income Securities Debt Instruments

FIN 472 Fixed-Income Securities Debt Instruments FIN 472 Fixed-Income Securities Debt Instruments Professor Robert B.H. Hauswald Kogod School of Business, AU The Most Famous Bond? Bond finance raises the most money fixed income instruments types of bonds

More information

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;

More information

Bond Pricing Fundamentals

Bond Pricing Fundamentals Bond Pricing Fundamentals Valuation What determines the price of a bond? Contract features: coupon, face value (FV), maturity Risk-free interest rates in the economy (US treasury yield curve) Credit risk

More information

Bonds, in the most generic sense, are issued with three essential components.

Bonds, in the most generic sense, are issued with three essential components. Page 1 of 5 Bond Basics Often considered to be one of the most conservative of all investments, bonds actually provide benefits to both conservative and more aggressive investors alike. The variety of

More information

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs.

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Objectives: Long-Term Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Premium Mortgages!

More information

Financial Instruments. Chapter 2

Financial Instruments. Chapter 2 Financial Instruments Chapter 2 Major Types of Securities debt money market instruments bonds common stock preferred stock derivative securities 1-2 Markets and Instruments Money Market debt instruments

More information

Introduction to swaps

Introduction to swaps Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald

More information

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

More information

Introduction to Bond Math Presentation to CDIAC

Introduction to Bond Math Presentation to CDIAC October 2, 2008 Peter Taylor, Managing Director, Public Finance Department Matthew Koch, Vice President, Public Finance Department Introduction to Bond Math Presentation to CDIAC Agenda Agenda I. What

More information

Lecture 11 Fixed-Income Securities: An Overview

Lecture 11 Fixed-Income Securities: An Overview 1 Lecture 11 Fixed-Income Securities: An Overview Alexander K. Koch Department of Economics, Royal Holloway, University of London January 11, 2008 In addition to learning the material covered in the reading

More information

Problems and Solutions

Problems and Solutions Problems and Solutions CHAPTER Problems. Problems on onds Exercise. On /04/0, consider a fixed-coupon bond whose features are the following: face value: $,000 coupon rate: 8% coupon frequency: semiannual

More information

CHAPTER 5. Interest Rates. Chapter Synopsis

CHAPTER 5. Interest Rates. Chapter Synopsis CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)

More information

VALUATION OF FIXED INCOME SECURITIES. Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting

VALUATION OF FIXED INCOME SECURITIES. Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting VALUATION OF FIXED INCOME SECURITIES Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting OUTLINE Introduction Valuation Principles Day Count Conventions Duration Covexity Exercises

More information

Chapter 2 Present Value

Chapter 2 Present Value Chapter 2 Present Value Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination of risk-adjusted

More information

Bond Price Arithmetic

Bond Price Arithmetic 1 Bond Price Arithmetic The purpose of this chapter is: To review the basics of the time value of money. This involves reviewing discounting guaranteed future cash flows at annual, semiannual and continuously

More information

Bond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows

Bond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows Bond Valuation Chapter 7 Bonds, Bond Valuation, and Interest Rates Valuing the cash flows (1) coupon payment (interest payment) = (coupon rate * principal) usually paid every 6 months (2) maturity value

More information

Third Edition BOND MARKETS, ANALYSIS AND STRATEGIES. Frank J. Fabozzi, CFA. Adjunct Professor of Finance School of Management Yale University

Third Edition BOND MARKETS, ANALYSIS AND STRATEGIES. Frank J. Fabozzi, CFA. Adjunct Professor of Finance School of Management Yale University Third Edition BOND MARKETS, ANALYSIS AND STRATEGIES Frank J. Fabozzi, CFA Adjunct Professor of Finance School of Management Yale University PRENTICE HALL, Upper Saddle River, NJ 07458 Preface xi Chapter

More information

Notes for Lecture 3 (February 14)

Notes for Lecture 3 (February 14) INTEREST RATES: The analysis of interest rates over time is complicated because rates are different for different maturities. Interest rate for borrowing money for the next 5 years is ambiguous, because

More information

How Securities Are Traded. Chapter 3

How Securities Are Traded. Chapter 3 How Securities Are Traded Chapter 3 Primary vs. Secondary Security Sales Primary new issue issuer receives the proceeds from the sale first-time issue: IPO = issuer sells stock for the first time seasoned

More information

Mortgage-Backed Securities. Mortgage Loans Pass-throughs and Prepayments CMOs Analysis of MBS Pricing and Convexity

Mortgage-Backed Securities. Mortgage Loans Pass-throughs and Prepayments CMOs Analysis of MBS Pricing and Convexity Mortgage-Backed Securities/1 Asset-Backed Securities Mortgage-Backed Securities Prof. Ian Giddy Stern School of Business New York University Mortgages and MBS Mortgage Loans Pass-throughs and Prepayments

More information

Investors Chronicle Roadshow 2011. Trading Bonds on the London Stock Exchange

Investors Chronicle Roadshow 2011. Trading Bonds on the London Stock Exchange Investors Chronicle Roadshow 2011 Trading Bonds on the London Stock Exchange Agenda How do bonds work? Risks associated with bonds Order book for Retail Bonds London Stock Exchange Website Tools 2 How

More information

Maturity The date where the issuer must return the principal or the face value to the investor.

Maturity The date where the issuer must return the principal or the face value to the investor. PRODUCT INFORMATION SHEET - BONDS 1. WHAT ARE BONDS? A bond is a debt instrument issued by a borrowing entity (issuer) to investors (lenders) in return for lending their money to the issuer. The issuer

More information

Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices

Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices 196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its

More information

Caps, Floors, and Collars

Caps, Floors, and Collars Caps, Floors, and Collars Concepts and Buzzwords Caps Capped Floaters Inverse Floaters with % Floor Floors Floaters with Floors Collars Floaters with Collars Strike rate, settlement frequency, index, notional

More information

THE STOCK MARKET GAME GLOSSARY

THE STOCK MARKET GAME GLOSSARY THE STOCK MARKET GAME GLOSSARY Accounting: A method of recording a company s financial activity and arranging the information in reports that make the information understandable. Accounts payable: The

More information

MEDICAID ELIGIBILITY MANUAL, VOLUME III REVISED 11-01-96 PAGE 6280

MEDICAID ELIGIBILITY MANUAL, VOLUME III REVISED 11-01-96 PAGE 6280 REVISED 11-01-96 PAGE 6280 G. INVESTMENTS Other common investment vehicles include stocks and CONTRACTS bonds and contracts refer to promissory notes, loans and property agreements. 1. Stocks Shares of

More information

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1 Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to

More information

Understanding Fixed Income

Understanding Fixed Income Understanding Fixed Income 2014 AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Understanding Fixed Income About fixed income at AMP Capital Our global presence helps us deliver outstanding

More information

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.) Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

More information

Important Information about Investing in Bonds

Important Information about Investing in Bonds Robert W. Baird & Co. Incorporated Important Information about Investing in Bonds Baird has prepared this document to help you understand the characteristics and risks associated with bonds and other fixed

More information

FinQuiz Notes 2 0 1 4

FinQuiz Notes 2 0 1 4 Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.

More information

TRADING BONDS ON THE LONDON STOCK EXCHANGE A GUIDE FOR PRIVATE INVESTORS. The new electronic order book for retail bonds

TRADING BONDS ON THE LONDON STOCK EXCHANGE A GUIDE FOR PRIVATE INVESTORS. The new electronic order book for retail bonds TRADING BONDS ON THE LONDON STOCK EXCHANGE A GUIDE FOR PRIVATE INVESTORS The new electronic order book for retail bonds Contents Introduction 3 What are bonds? 3 Bond basics 4 Types of bond issuer 5 Bond

More information

Bonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges.

Bonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges. Investing in bonds Despite their names, ShareScope and SharePad are not just all about shares. They can help you with other investments as well. In this article I m going to tell you how you can use the

More information

Present Value and Annuities. Chapter 3 Cont d

Present Value and Annuities. Chapter 3 Cont d Present Value and Annuities Chapter 3 Cont d Present Value Helps us answer the question: What s the value in today s dollars of a sum of money to be received in the future? It lets us strip away the effects

More information

Chapter 6 Interest Rates and Bond Valuation

Chapter 6 Interest Rates and Bond Valuation Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Chapter 4: Common Stocks. Chapter 5: Forwards and Futures

Chapter 4: Common Stocks. Chapter 5: Forwards and Futures 15.401 Part B Valuation Chapter 3: Fixed Income Securities Chapter 4: Common Stocks Chapter 5: Forwards and Futures Chapter 6: Options Lecture Notes Introduction 15.401 Part B Valuation We have learned

More information

CHAPTER 7 INTEREST RATES AND BOND VALUATION

CHAPTER 7 INTEREST RATES AND BOND VALUATION CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury

More information

Alliance Consulting BOND YIELDS & DURATION ANALYSIS. Bond Yields & Duration Analysis Page 1

Alliance Consulting BOND YIELDS & DURATION ANALYSIS. Bond Yields & Duration Analysis Page 1 BOND YIELDS & DURATION ANALYSIS Bond Yields & Duration Analysis Page 1 COMPUTING BOND YIELDS Sources of returns on bond investments The returns from investment in bonds come from the following: 1. Periodic

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information