ANALYSIS OF FIXED INCOME SECURITIES


 Scott Hodge
 1 years ago
 Views:
Transcription
1 ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1
2 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its price. Often times the market also used yield and yield spread as a relative measure of value. DEFINITIONS OF FIXED INCOME SECURITY TERMINOLOGIES Fixed Income Security is a financial obligation of an entity that promises to pay a specified sum of money at a specified future dates. The entity that promises to pay is called the issuer. Fixed Income Securities fall into two broad categories: 1. Debt obligations here the issuer is the borrower and the lender is the investor or creditor. The issuer promises to pay interest and principal at maturity at agreed future dates e.g. bonds, mortgage backed securities, asset backed securities and bank loans 2. Preferred Stock  represents an ownership interest in a corporation with fixed dividend payments. Dividend is however paid from after tax profit and is payable only when there is profit but in preference to the ordinary stock holders Indenture & Covenants are the terms in terms of rights of the holders and the promises of the issuer. These terms are usually managed by a Trustee on behalf of all bondholders. As part of the indenture there are affirmative and negative covenants. Term to Maturity is the number of years over which the issuer promises to meet the obligation. The term to maturity is the same as the tenor only on the date the security is issued, thereafter the term to maturity is lower than the tenor as time elapses. Par Value is the amount the security promises to repay at maturity i.e. the principal, face value, redemption value and maturity value. The practice is to quote the price of a security as a percentage of its Par Value i.e. the Par Value is deemed to be 100. Valuation of Fixed Income Securities Page 2
3 When a security is trading at below its Par Value, it is said to be trading at a Discount. When it is the converse i.e. it is trading above its Par Value, then it is said to be trading at a Premium. Coupon rate is the interest rate that the issuer agrees to pay each year. Also, called the nominal rate. The actual monetary amount paid annually is called the Coupon. Not all fixed income securities promises to pay a coupon. When a security promises to pay only one fixed amount, it is called a ZeroCoupon instrument. BASIC PRINCIPLES OF VALUATION The Price of any financial instrument is equal to the present value of the expected cash flows from the instrument. There are 3 (three) basic steps to valuation  Step 1: Estimate of the expected cash flows periodic coupon payments to maturity date par (or maturity) value at maturity Step 2: Estimate of the appropriate discount rate on comparable bonds in the market i.e. noncallable bonds of the same credit quality and same maturity. Step 3: Calculation of the Present Value (PV) of the expected cash flows in Step 1 using the discount rate(s) in Step 2. STEP 1: ESTIMATE THE EXPECTED CASH FLOWS Cash flow is simply the cash that is expected to be received in the future from an investment whether it is interest or principal. The expected cash flows for some instruments are easy to compute, for others, the task is more difficult e.g.: Valuation of Fixed Income Securities Page 3
4 1. When the issuer or investor has the option to change the contractual date of the repayment of the principal e.g. callable/putable bonds, mortgage backed securities, asset backed securities, etc. 2. The coupon payment is reset periodically based on a formula that depends on some value or values for reference rates, prices or exchange rates e.g. floating rate securities 3. The investor has a choice to convert or exchange the security into common shares e.g. convertible bonds and exchangeable bonds STEP 2: DETERMINING THE APPROPRIATE RATE(S) The minimum rate an investor should use is that on a defaultfree cash flow (i.e. Treasuries) with the same maturity. The premium over this rate should reflect the additional risks of the specific instrument which the investor takes. Consequently, the required rate is the rate for financial instruments with comparable risk or alternative (or substitute) investments for each of the tenors of the expected cash flows. STEP 3: DISCOUNTING THE CASH FLOWS In general, the price of a bond is given by P = C + C + C + + C + M 1+ r (1+ r) 2 (1+ r) 3 (1+ r) n (1+ r) n or: P = C + M (1+ r) t (1+ r) n where: C = coupon payments usually semiannual P = price of the investment n = number of periods r = periodic interest rate M = maturity value t = time period when the payment is received Valuation of Fixed Income Securities Page 4
5 This valuation model supports the use of a different discount rate for each cash flow otherwise we may use the Annuity Concept. A shortcut formula for computing the value of a security when a single discount rate is used is to compute the present value of the Annuity (the interest payments) and then adding the Present Value of the maturity value. The present value of an annuity is equal to 11 Annuity payment X (1 + r) n r PRESENT VALUE PROPERTIES A bond that matures in 4 years time has a coupon rate of 10% with an annual interest payment frequency. a. Assuming applicable discount rate for similar security is 8%, what is the price of the bond today? b. If the discount rate is changed to 12%, what will the price be? Year Cash Flow Present 8% Present 12% 1 N Price Valuation of Fixed Income Securities Page 5
6 NOTE: TIMING: The longer the term to maturity, the lower the value of the cash flow today DISCOUNT RATE: The higher the discount rate, the lower the security value RELATIONSHIP OF COUPON RATE, DISCOUNT RATE & PRICE RELATIVE TO PAR: Coupon rate = yield required; price = par value Coupon rate < yield required; price < par value Coupon rate > yield required; price > par value CHANGE IN VALUE AS TIME MOVES CLOSE TO MATURITY: A bond s valueo Decreases over time if the bond is selling at a premium o Increases over time when the bond is selling at a discount o Is unchanged if the bond is selling at par value o At maturity is equal to its Par Value VALUATION USING MULTIPLE DISCOUNT RATES The proper way to value the cash flows of any security is to use a different discount rate that is unique to the time period in which the cash flow will be received. Suppose we have a 4year 10% coupon bond with annual interest payment and the appropriate discount rates are as follows: Year 1 6.8% Year 2 7.2% Year 3 7.6% Year 4 8.0% The present value or price for this instrument today is: Valuation of Fixed Income Securities Page 6
7 Cash flow Discount rate Discounted value Year % Year % Year % Year % Price Practice: What is the value of a 5year 7% coupon bond assuming the payments are received annually and the discount rates for each year are as follow: Year 1 3.5% Year 2 3.9% Year 3 4.2% Year 4 4.5% Year 5 5.0% VALUING SEMIANNUAL CASH FLOWS For semiannual cash flows, the computation remains the same except that both the cash flow and discount rate are adjusted to half of the annual. A period is a sixmonth period i.e. the number of periods will double. VALUING ZEROCOUPON BOND A zero coupon bond has only one cash flow the maturity value. The value of a zerocoupon bond that matures n years from now is Maturity value (1 + i) n x 2 Where i is the semiannual discount rate n is the number of years to maturity Valuation of Fixed Income Securities Page 7
8 Note: The number of periods is n X 2 for consistency with the pricing of coupon bearing bonds in the market. Exercise: Complete the following table for a 10 year zero coupon bond with a maturity value of $1,000 for each of the following annual discount rates. Annual rate 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% Semiannual rate Price Valuation of Fixed Income Securities Page 8
9 COMPLICATIONS IN VALUING FIXED INCOME SECURITIES 1. Next Coupon Payment in less than six months For coupon paying securities, a complication arises when we try to price the instrument between coupon payments. This is because one of the cash flows (the immediate) encompasses two components as shown below: Interest earned by seller Interest earned by buyer Last coupon Settlement Next coupon payment date date payment date Interest earned by the seller is the interest accrued between the last coupon payment and the settlement date. This is called Accrued interest. The buyer must compensate the seller for this and recovers it from the next interest payment. The Price determined using the present value concept is called the Full or Dirty Price is that is the amount paid by the investor. From the Full Price, the accrued interest is deducted to get the Clean Price which is true price of the bond. In computing the Full price of a bond, the formula is  Present value t = expected cash flow (1 + I ) t 1+w Where: w period = days btw settlement and next coupon date no of days in coupon period Valuation of Fixed Income Securities Page 9
10 Illustration: A 5year semiannual 10% coupon security is being sold on a day that is 78 days between the settlement date and the next coupon date. There are 182 days in the coupon period. w = 78/182 = periods Period 1: Present Value 1 = 5 = (1.04) Period 2: Present Value 2 = 5 = (1.04) Period 3: Present Value 3 = 5 = (1.04) Period 4: Present Value 4 = 5 = (1.04) Period 5: Present Value 5 = 105 = (1.04) Full Price is the sum of the PV of the cash flows, which is The Accrued Interest (AI) is computed as Semiannual coupon payment X (1 w) AI = N5 X ( ) = N Clean Price = N = N Practice: Suppose a bond is purchased between coupon periods. The days between settlement date and the next coupon period is 58. There are 183 days in the coupon period. Valuation of Fixed Income Securities Page 10
11 Suppose that the bond purchased has a coupon rate of 7% and there are 10 semiannual coupon payments remaining. a. What is the full price for this bond if a 5% annual discount rate is used? b. What is the Clean Price? DAY COUNT CONVENTIONS Different dayyear (interest basis) conventions apply to instruments in different markets. Those of us who engage in international capital markets, should be familiar with the conventions: Eurodollar (LIBOR) market Actual/360 Eurobond market (AIBD) 360/360 US Treasury/ Ghanaian Money Market Actual/365 Nigeria Money Market (NMM) Actual/Actual The numerator depicts the number of days interest is to be earned while the denominator depicts the number of days in a year in the relevant market. Example: A coupon bearing US Treasury security whose previous coupon payment was March 1 and the next is September 1. Suppose this Treasury security is purchased with a settlement date of July 17 th. Days between Settlement and Next Coupon Dates is actual days from July 17 th to September 1 st Valuation of Fixed Income Securities Page 11
12 US Treasury Eurobond July 17 to July days 13 days August 31 days 30 days September 1 1 day 1 46 days 44 days The number of days in the coupon period is computed as follows March 30 days 29 days April May June July August September 1 1 Total 184 days 180 days 2. Cash flows are unknown This problem occurs largely with callable or putable bonds. With these bonds, the cash flows will depend on the current level of interest rate relative to the coupon rate. The valuation of these securities is done using valuation models such as the Binomial model (which seeks to price the embedded interest rate options) and the Monte Carlo Simulation Model (which is used for mortgaged backed securities and certain types of asset backed securities. This prices both embedded interest rate options and prepayment options) Valuation of Fixed Income Securities Page 12
13 VALUATION OF FIXED INCOME SECURITIES Exercises 1. What is the price of a 5year security that pays 7% annually assuming a discount rate of 5%. 2. A 5year amortizing security with a par value of N10,000 and a coupon rate of 5% has an expected cash flow of N2, per year assuming there are no prepayments. The annual cash flow includes interest and principal repayment. What is the present value of this amortizing security assuming a discount rate of 6%. 3. What will be the initial offering price for the following bonds: a. A 15year zero coupon bond, assuming a discount rate of 12% b. A 20year zero coupon bond, assuming a discount rate of 10% 4. An 8.4% coupon bond issued by the State of Indiana sells for $1,000. The income on this bond is tax exempt. What coupon rate on a corporate bond selling at its par $1,000 value would produce the same aftertax return to the investor as the municipal bond if the investor is in the: a. 15% marginal tax bracket b. 25% marginal tax bracket c. 35% marginal tax bracket 5. At what price would you expect a bond with the following characteristics to trade in the market assuming the expected yield for this quality of bond is 10% Par Value $1,000 Coupon rate 8% Valuation of Fixed Income Securities Page 13
14 Payment frequency annually Term to maturity 10 years 6. What is the value of a 5year 5.85% coupon bond if the appropriate discount rate for each cash flow is as follows: Year Discount rate % % % % % 7. Suppose a bond is selling between coupon periods. The days between the settlement date and the next coupon period is 115. There are 183 days in the coupon period. Suppose the bond has a coupon rate of 7.4% and there are 10 semiannual coupon payments remaining. a. What is the dirty price of the bond? b. What is the Accrued Interest? c. What is the clean price? 8. What is the value of a zero coupon bond that matures in 20 years, has a maturity of $1 million and is selling to yield 7.6% 9. What factors will you take into consideration in valuing bonds? 10. What are the factors that complicate bond pricing and why? Valuation of Fixed Income Securities Page 14
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 informationClick Here to Buy the Tutorial
FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin534/fin534week4quiz3 str/ For more course tutorials visit www.tutorialoutlet.com Which of the following
More informationAmerican 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 informationNATIONAL 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 informationAsset 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 informationChapter 9 Bonds and Their Valuation ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 91 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as
More informationChapter 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 informationChapter 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 10year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity
More informationBond Market Overview and Bond Pricing
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 What is A Bond? Bond:
More informationBond 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 informationIntroduction 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 informationCHAPTER 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 informationFixed Income: Practice Problems with Solutions
Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semiannual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.
More informationIntroduction to Fixed Income (IFI) Course Syllabus
Introduction to Fixed Income (IFI) Course Syllabus 1. Fixed income markets 1.1 Understand the function of fixed income markets 1.2 Know the main fixed income market products: Loans Bonds Money market instruments
More informationLOS 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 informationExam 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 informationInterest 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 informationAnalysis 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 informationChapter 5: Valuing Bonds
FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A longterm debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations
More informationCHAPTER 10 Reporting and Analyzing Liabilities. Accounting for Notes Payable Obligations in the form of written notes are recorded as notes payable.
CHAPTER 10 Reporting and Analyzing Liabilities Accounting for Notes Payable Obligations in the form of written notes are recorded as notes payable. Notes payable usually require the borrower to pay interest
More informationFin 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 informationChapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 41
Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 41 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to
More information Short term notes (bonds) Maturities of 14 years  Mediumterm notes/bonds Maturities of 510 years  Longterm bonds Maturities of 1030 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 informationCHAPTER 14: BOND PRICES AND YIELDS
CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3month Tbill: ( 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 informationFNCE 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 informationCHAPTER 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. Longterm Treasury securities have substantial
More informationBonds 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 informationCHAPTER15. LongTerm Liabilities. Acct202 151
CHAPTER15 LongTerm Liabilities Acct202 151 152 PreviewofCHAPTER15 Bond Basics Bonds are a form of interestbearing notes payable. Three advantages over common stock: 1. Stockholder control is not affected.
More informationBond 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 longterm debt securities 2. Issues 3. Summary 1. Valuation of longterm debt securities Debt securities are obligations
More informationAnswers to Review Questions
Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual
More informationNotes 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 informationChapter. Bond Prices and Yields. McGrawHill/Irwin. Copyright 2008 by The McGrawHill Companies, Inc. All rights reserved.
Chapter Bond Prices and Yields McGrawHill/Irwin Copyright 2008 by The McGrawHill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship
More informationBonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities
Bonds and preferred stock Investing in fixed income securities Basic definitions Stock: share of ownership Stockholders are the owners of the firm Two types of stock: preferred and common Preferred stock:
More informationUS TREASURY SECURITIES  Issued by the U.S. Treasury Department and guaranteed by the full faith and credit of the United States Government.
Member NASD/SIPC Bond Basics TYPES OF ISSUERS There are essentially five entities that issue bonds: US TREASURY SECURITIES  Issued by the U.S. Treasury Department and guaranteed by the full faith and
More informationBond 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 informationChapter 10. Fixed Income Markets. FixedIncome Securities
Chapter 10 FixedIncome Securities Bond: Tradable security that promises to make a prespecified series of payments over time. Straight bond makes fixed coupon and principal payment. Bonds are traded mainly
More informationChapter 4 Bonds and Their Valuation ANSWERS TO ENDOFCHAPTER QUESTIONS
Chapter 4 Bonds and Their Valuation ANSWERS TO ENDOFCHAPTER QUESTIONS 41 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as government
More informationSTATUTORY BOARD SBFRS 32 FINANCIAL REPORTING STANDARD. Financial Instruments: Presentation Illustrative Examples
STATUTORY BOARD SBFRS 32 FINANCIAL REPORTING STANDARD Financial Instruments: Presentation Illustrative Examples CONTENTS Paragraphs ACCOUNTING FOR CONTRACTS ON EQUITY INSTRUMENTS OF AN ENTITY Example
More informationSTATUTORY BOARD FINANCIAL REPORTING STANDARD SBFRS 32. Financial Instruments: Presentation Illustrative Examples
STATUTORY BOARD FINANCIAL REPORTING STANDARD SBFRS 32 Financial Instruments: Presentation Illustrative Examples CONTENTS Paragraphs ACCOUNTING FOR CONTRACTS ON EQUITY INSTRUMENTS OF AN ENTITY Example
More informationReview for Exam 1. Instructions: Please read carefully
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationCallable Bonds  Structure
1.1 Callable bonds A callable bond is a fixed rate bond where the issuer has the right but not the obligation to repay the face value of the security at a preagreed value prior to the final original maturity
More informationLongTerm Debt. Objectives: simple present value calculations. Understand the terminology of longterm debt Par value Discount vs.
Objectives: LongTerm Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of longterm debt Par value Discount vs. Premium Mortgages!
More informationChapter 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 informationInvesting in Bonds  An Introduction
Investing in Bonds  An Introduction By: Scott A. Bishop, CPA, CFP, and Director of Financial Planning What are bonds? Bonds, sometimes called debt instruments or fixedincome securities, are essentially
More informationECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation
ECO 4368 Instructor: Saltuk Ozerturk Bonds and Their Valuation A bond is a long term contract under which a borrower (the issuer) agrees to make payments of interest and principal on speci c dates, to
More information2. 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 information20. 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 informationChapter 16. Debentures: An Introduction. Noncurrent Liabilities. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia.
PowerPoint to accompany Noncurrent Liabilities Chapter 16 Learning Objectives 1. Account for debentures payable transactions 2. Measure interest expense by the straight line interest method 3. Account
More informationBond 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 markets» What
More informationINTERACTIVE 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 informationCHAPTER 2. Asset Classes. the Money Market. Money market instruments. Capital market instruments. Asset Classes and Financial Instruments
22 Asset Classes Money market instruments CHAPTER 2 Capital market instruments Asset Classes and Financial Instruments Bonds Equity Securities Derivative Securities The Money Market 23 Table 2.1 Major
More informationFIN 472 FixedIncome Securities Debt Instruments
FIN 472 FixedIncome 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 informationModule 8: Current and longterm liabilities
Module 8: Current and longterm liabilities Module 8: Current and longterm liabilities Overview In previous modules, you learned how to account for assets. Assets are what a business uses or sells to
More informationInterest 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 informationTax rules for bond investors
Tax rules for bond investors Understand the treatment of different bonds Paying taxes is an inevitable part of investing for most bondholders, and understanding the tax rules, and procedures can be difficult
More informationCHAPTER 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 informationTVM Applications Chapter
Chapter 6 Time of Money UPS, Walgreens, Costco, American Air, Dreamworks Intel (note 10 page 28) TVM Applications Accounting issue Chapter Notes receivable (longterm receivables) 7 Longterm assets 10
More informationMEDICAID ELIGIBILITY MANUAL, VOLUME III REVISED 110196 PAGE 6280
REVISED 110196 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 informationCHAPTER 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 informationChapter 11. Stocks and Bonds. How does this distribution work? An example. What form do the distributions to common shareholders take?
Chapter 11. Stocks and Bonds Chapter Objectives To identify basic shareholder rights and the means by which corporations make distributions to shareholders To recognize the investment opportunities in
More informationImportant 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 informationLesson 6 Save and Invest: Bonds Lending Your Money
Lesson 6 Save and Invest: Bonds Lending Your Money Lesson Description This lesson introduces bonds as an investment option. Using a series of classroom visuals, students will identify the three main parts
More informationModule 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 ShortTerm Debt (ShortTerm Loans, Line of
More informationMathematics. 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 informationBonds. Accounting for LongTerm Debt. Agenda LongTerm Debt. 15.501/516 Accounting Spring 2004
Accounting for LongTerm Debt 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology April 5, 2004 1 Agenda LongTerm Debt Extend our
More informationMONEY MARKET SUBCOMMITEE(MMS) FLOATING RATE NOTE PRICING SPECIFICATION
MONEY MARKET SUBCOMMITEE(MMS) FLOATING RATE NOTE PRICING SPECIFICATION This document outlines the use of the margin discounting methodology to price vanilla money market floating rate notes as endorsed
More informationMaturity 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 informationInterest Rate and Credit Risk Derivatives
Interest Rate and Credit Risk Derivatives Interest Rate and Credit Risk Derivatives Peter Ritchken Kenneth Walter Haber Professor of Finance Weatherhead School of Management Case Western Reserve University
More informationBond Return Calculation Methodology
Bond Return Calculation Methodology Morningstar Methodology Paper June 30, 2013 2013 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction
More informationMONEY MARKET FUND GLOSSARY
MONEY MARKET FUND GLOSSARY 1day SEC yield: The calculation is similar to the 7day Yield, only covering a one day time frame. To calculate the 1day yield, take the net interest income earned by the fund
More informationTopics 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 informationDick Schwanke Finite Math 111 Harford Community College Fall 2013
Annuities and Amortization Finite Mathematics 111 Dick Schwanke Session #3 1 In the Previous Two Sessions Calculating Simple Interest Finding the Amount Owed Computing Discounted Loans Quick Review of
More informationLoan types and business terms Business customers
Loan types and business terms Business customers Applicable as from 7. November 2015 Page 1 of 38 Welcome to Realkredit Danmark We want to provide you with all the information you need to decide on how
More informationYou 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 informationTRADING 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 informationInternational Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions
International Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions This Annex supplements and should be read in conjunction with the General Disclosure Statement. NOTHING
More informationBonds. 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 informationBond Pricing Fundamentals
Bond Pricing Fundamentals Valuation What determines the price of a bond? Contract features: coupon, face value (FV), maturity Riskfree interest rates in the economy (US treasury yield curve) Credit risk
More informationExercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases).
Exercise 1 At what rate of simple interest will $500 accumulate to $615 in 2.5 years? In how many years will $500 accumulate to $630 at 7.8% simple interest? (9,2%,3 1 3 years) Exercise 2 It is known that
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationInvestors 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 informationExcel 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 informationBond 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 informationReview 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 informationof Investments Fundamentals Security Types C h a p t e r Valuation & Management second edition Charles J.Corrado Bradford D.
3 C h a p t e r Security Types 31 Fundamentals of Investments Valuation & Management second edition Charles J.Corrado Bradford D.Jordan Slides by YeeTien (Ted) Fu 32 Security Types Goal Our goal in
More informationEcon 330 Exam 1 Name ID Section Number
Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth
More informationThe Time Value of Money (contd.)
The Time Value of Money (contd.) February 11, 2004 Time Value Equivalence Factors (Discrete compounding, discrete payments) Factor Name Factor Notation Formula Cash Flow Diagram Future worth factor (compound
More information7. (a) Place and Method of Offering / (b) Offer price of the Bonds:
FOR RELEASE: September 2, 2004 Notice Concerning Issuance of Euro Yen Convertible Bonds due 2011 (convertible bonds type  bonds with stock acquisition rights, tenkanshasaigata shinkabu yoyakukentsuki
More informationUnderstanding Hybrid Securities. ASX. The Australian Marketplace
Understanding Hybrid Securities ASX. The Australian Marketplace Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain
More informationCHAPTER 7: FIXEDINCOME SECURITIES: PRICING AND TRADING
CHAPTER 7: FIXEDINCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The presentvalue calculation is used to estimate how much an investor should pay for a bond;
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM0905. April 28, 2014: Question and solutions 61 were added. January 14, 2014:
More informationCHAPTER 4. Definition 4.1 Bond A bond is an interestbearing certificate of public (government) or private (corporate) indebtedness.
CHAPTER 4 BOND VALUATION Gentlemen prefer bonds. Andrew Mellon, 18551937 It is often necessary for corporations and governments to raise funds to cover planned expenditures. Corporations have two main
More informationIntroduction. Why does Government Issue securities. How does a Bond work?
Introduction Namibian Government longterm securities are issued in the form of Internal Registered Stock (IRS). Government securities are essentially IOU declarations (or debt instruments) by the Government
More information6. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.
1. A company purchased land for $72,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start.
More informationBond 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 longterm basis, it usually does so by issuing or selling debt securities called bonds. A bond
More informationU.S. Treasury Securities
U.S. Treasury Securities U.S. Treasury Securities 4.6 Nonmarketable To help finance its operations, the U.S. government from time to time borrows money by selling investors a variety of debt securities
More informationFinancial Instruments. Chapter 2
Financial Instruments Chapter 2 Major Types of Securities debt money market instruments bonds common stock preferred stock derivative securities 12 Markets and Instruments Money Market debt instruments
More informationGoals. 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 informationChapter 6. FixedIncome Securities: Features and Types CSI GLOBAL EDUCATION INC. (2013) 6 1
Chapter 6 FixedIncome Securities: Features and Types 6 1 6 FixedIncome Securities: Features and Types CHAPTER OUTLINE What is the FixedIncome Marketplace? The Rationale for Issuing FixedIncome Securities
More information