FIN 472 FixedIncome Securities Debt Instruments


 Allan Ford
 1 years ago
 Views:
Transcription
1 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 and loans Valuation: the two twins price and return: yieldtomaturity pricing Learning objectives: pricing simple bonds and introduction to risk inherent in different bonds FT and bond reporting 1/12/2016 Debt Instruments Robert B.H. Hauswald 2
2 Cash Flow Valuation The building blocks of valuation interest and discount rates future value and present value financial decision making: NET Present Value Valuation formulae: discrete and continuous simple cash flows mind the dates! 1/12/2016 Debt Instruments Robert B.H. Hauswald 3 Valuation Fundamentals Present Value of Future Cash Flows Link Risk & Return Expected Return on Assets Valuation 1/12/2016 Debt Instruments Robert B.H. Hauswald 4
3 The Basic Valuation Insight P 0 = CF (1 + r 1 ) 1 + CF (1 + r 2 ) CF (1 + r n ) n P 0 = Price of asset at time 0 (today) CF t = cash flow expected at time t r = discount rate (reflecting asset s risk) n = number of discounting periods (usually years) This model can express the price of any asset at t mathematically. 1/12/2016 Debt Instruments Robert B.H. Hauswald 5 Valuation of Financial Instruments First Principles: Value of financial securities = PV of expected future cash flows To value bonds and stocks we need to: Estimate future cash flows: Size (how much) and Timing (when) Discount future cash flows at an appropriate rate: The rate should be appropriate to the risk presented by the security. 1/12/2016 Debt Instruments Robert B.H. Hauswald 6
4 Fixed Income Instruments Contractually fixed cash flows at certain (fixed) future dates conceptual: portfolio of cash flows legal: backed by general credit of issuer recovery right in case of missed payment or default examples: CDs, loans, CP, bills, bonds Valuation questions the price is right? what is return and borrowing cost? how to compare returns across instruments? 1/12/2016 Debt Instruments Robert B.H. Hauswald 7 Bond Types Bonds: standardized fixed income security generally tradable, long term (10+ or 15+ years) standardized: same conditions for all owners of security Debenture: Unsecured Bond of 15 years or more backed by general credit of the firm Note: typically 310 years unsecured Bill: less than 1 Year duration does not pay coupon: interest at the end types of bills: Tbills, commercial paper 1/12/2016 Debt Instruments Robert B.H. Hauswald 8
5 Loan Types Bank loan: terms are not standardized negotiable, flexible: what does this mean for price? Pure discount loans: corresponds to what FI security? Borrower pays a single lump sum (principal and interest) at maturity Interest only: corporate, sovereign bonds borrower pays interest only (coupon) each period and entire principal at maturity. Amortized loans: consumer (mortgage) loans borrower repays part or all of principal over the life of the loan 1. fixed amount of principal repaid each period: uneven payments 2. fixed payments: uneven principal reduction. 1/12/2016 Debt Instruments Robert B.H. Hauswald 9 Bond Characteristics: Jargon Coupon: Principal: Par (Face) Value: Coupon Rate: Maturity: Price/Proceeds: Current Yield: YieldtoMaturity: Allin Cost: Interest Payment Amount Borrowed Amount Repaid at End of Loan Coupon / Face Value Years Until Repayment Amount Raised Coupon / Current Price Lifetime return of the bond Lifetime cost of the bond 1/12/2016 Debt Instruments Robert B.H. Hauswald 10
6 Bond Example Consider a U.S. government bond listed as 6 3/8 of December The Par Value of the bond is $1,000. Coupon payments are made semiannually (June 30 and December 31 for this particular bond). Since the coupon rate is 6 3/8 the payment is $ On January 1, 2002 the size and timing of cash flows are: $ $ L $ $1, /1/ 02 6 / 30 / / 31/ 02 6 / 30 / / 31/ 09 1/12/2016 Debt Instruments Robert B.H. Hauswald 11 Bond or Loan Structure Covenants: legal provisions giving bondholders right to specific actions such as forcing bankruptcy Security: pledged assets committed to paying off debt, Mortgage Bond Seniority: order of payment in bankruptcy 1st Secured debt, Senior Debt, then Subordinated Debentures. Call provision: enables corporation to repay and retire the debt at will before maturity (on coupon dates only) Sinking funds or serial maturities: fund that firm contributes cash to for repayment. investors know in advance when each bond series will be repaid Investment Grade Bonds: Bonds rated Baa or higher by Moody's or BBB or higher by Standard & Poors. 1/12/2016 Debt Instruments Robert B.H. Hauswald 12
7 Pure Discount Bonds Information needed for valuing pure discount bonds: Time to maturity (T) = Maturity date  today s date Face value (F) Discount rate (r): return on bond = yield to maturity $0 $0 L $0 $F T 1 T Present value of a pure discount bond at time 0: PV F = ( 1+ r) 1/12/2016 Debt Instruments Robert B.H. Hauswald 13 T Pure Discount Bonds: Example Find the value of a 30year zerocoupon bond with a $1,000 par value and a YTM of 6%. $0 $0 L $0 $1, PV F (1 + r) = T = $1,000 (1.06) 30 = $ /12/2016 Debt Instruments Robert B.H. Hauswald 14
8 Bond Pricing Information needed to value levelcoupon bonds: Coupon payment dates and time to maturity (T) Coupon payment (C) per period and Face value (F) Discount rate: YTM = r $C $C $C $ C + $F L 0 1 Value of a Levelcoupon bond = PV of coupon payment annuity + PV of face value PV C = r (1 + r) 1/12/2016 Debt Instruments Robert B.H. Hauswald 15 T T 1 F + (1 + r) T T Bond Pricing Illustration Find the present value (as of January 1, 2002), of a 63/8 coupon Tbond with semiannual payments, and a maturity date of December 2009 if the YTM is 5percent. On January 1, 2002 the size and timing of cash flows are: 1/1/ 02 $ / 30 / 02 $ L 12 / 31/ 02 $ / 30 / 09 $1, / 31/ 09 $ PV = (1.025) $1,000 + (1.025) = $1, /12/2016 Debt Instruments Robert B.H. Hauswald 16
9 Bond Pricing Exercise Suppose Harley Davidson Co. issued a global bond 20 years to maturity, notional face value $1,000 Annual coupon is $110. (11% Coupon Rate) Similar bonds have a yield to maturity of 11%. What is the bond s fair value? Present value of face value = $1,000/(1.11) 20 = $ Present value of coupons = $110 x (11/(1.11) 20 )/.11 = $110 x = $ Adding the discounted face value and coupons (rounding error): BOND VALUE = $ $ = $1000 NB: if the YTM and coupon rate are the same, the bond must be trading at PAR 1/12/2016 Debt Instruments Robert B.H. Hauswald 17 Bond Values and Yields Yield to Maturity: YTM, the required market discount rate that sets the discounted cash flows = bond s current Market Price calculated as the bond s internal rate of return (IRR) r Bond s typical cash flows: coupons and face value Example 1: Zero  Coupon Bond  Find the Value? Single Payment 10 years from now, $1,000, Yield to maturity on comparable bonds is 9%. Example 2: Zero  Coupon Bond  Find the YTM Single Payment 10 years from now, $1,000, Current Bond price: $400 Given price, how to find the yieldtomaturity (bond return)? 1/12/2016 Debt Instruments Robert B.H. Hauswald 18
10 Interest, Price, Return, Yield Comparing funding costs or investment returns across different maturities, market segments and instruments unified measure required for lifetime borrowing cost: YIELD example: 100, 100, 8% annual coupon, 15Y Borrowing cost/return measured by bond s IRR discount rate equating all cash flows to 0 including issue cost implies: yieldtomaturity (return to investor), allin cost (borrowing cost to issuer taking into account all fees) Yieldtomaturity: internal rate of return (discount rate) equating all cash flows (proceeds debt service) to 0 formula: y : 1,000 T Ct P + t 1 = t ( 1 + y) ( 1 + y) T 0 = 1/12/2016 Debt Instruments Robert B.H. Hauswald 19 0 Finding the Yield to Maturity It is usually a trial and error process to find the YTM: solving a nonlinear equation A financial calculator or tables is the quickest and easiest method Even better: EXCEL Facts of life about bond price and YTM: bond sells at a premium: YTM below coupon rate bond sells at a discount: YTM above coupon rate bond prices and YTM are inversely related! 1/12/2016 Debt Instruments Robert B.H. Hauswald 20
11 Term Structure of Interest Rates Relationship between yield and maturity is called the Term Structure of Interest Rates Graphical depiction is called a Yield Curve: Bloomberg Usually, yields on longterm securities are higher than on shortterm securities: premium for uncertainty and inflation Generally look at riskfree Treasury debt securities Yield curves normally upwardssloping Long yields > short yields Is often flat or inverted prior to recession The Federal Reserve Board sets what interest rate? 1/12/2016 Debt Instruments Robert B.H. Hauswald 21 Discount Bonds/Premium Bonds Discount bond: selling for less than par YTM is greater than the coupon rate. Premium bond: selling for more than par YTM is less than the coupon rate Examples: Discount/Premium bonds Example 1: If the YTM on bonds similar to that of the Harley Davidson Co. ($1,000 bond, $110 coupon, 20 years to maturity) were 13% instead of 11% the bonds would trade at? Example 2: If the YTM on bonds similar to that of the Harley Davidson Co. ($1,000 bond, $110 coupon, 20 years to maturity) were 9% instead of 11% the bonds would trade at? 1/12/2016 Debt Instruments Robert B.H. Hauswald 22
12 Bond Value $ YTM and Bond Value When the YTM < coupon, the bond trades at a premium. When the YTM = coupon, the bond trades at par /8 Discount Rate When the YTM > coupon, the bond trades at a discount. 1/12/2016 Debt Instruments Robert B.H. Hauswald 23 Bond 1: Discount Bond Present value of Principal = $1,000/(1.13) 20 = $86.78 Annuity present value of coupons = $110 x (11/(1.13) 20 )/.13 = $110 x = $ Price = $ $ = $ ==> The difference between this price, $859.50, and the par price of $1,000 is $ This is equal to the present value of the difference between YTM coupons and Harley Davidson's coupons: $130  $110 = $20 per year for 20 years at 13% = $20 x PVIFA(13%,20) = $20 x = $ /12/2016 Debt Instruments Robert B.H. Hauswald 24
13 Bond 2: Premium Bond Present value of principal = $1,000/(1.09) 20 = $ Annuity present value of coupons: = $110 x (11/(1.09) 20 )/.09 = $110 x = $1, Adding the discounted face value and coupons together = $ $1, = $1, The difference between this price, $1, and the par price of $1,000, $182.57, = present value of the difference between Harley Davidson's coupons and coupon of bond at PAR: = $110  $90 = $20 per year for 20 years at 9% = $20 x PVIFA(9%,20) = $20 x = $ /12/2016 Debt Instruments Robert B.H. Hauswald 25 Bonds: Premiums & Discounts What happens to bond values if required return is not equal to the coupon rate? The bond's value will differ from its par value R > Coupon Interest Rate P 0 < par value = DISCOUNT R < Coupon Interest Rate P 0 > par value = PREMIUM 1/12/2016 Debt Instruments Robert B.H. Hauswald 26
14 Rules for Bond Pricing 1. Bond prices and market interest rates move in opposite directions. 2. When coupon rate = YTM, price = par value. When coupon rate > YTM, price > par value (premium bond) When coupon rate < YTM, price < par value (discount bond) 3. A bond with longer maturity has higher relative (%) price change than one with shorter maturity when interest rate (YTM) changes. All other features are identical. 4. A lower coupon bond has a higher relative price change than a higher coupon bond when YTM changes. All other features are identical. 1/12/2016 Debt Instruments Robert B.H. Hauswald 27 Summary Bond valuation: focus on the Cash Flows Split valuation problem into 2 parts the PV of the coupon payments the PV of the final payment: redemption Fair price of bonds = sum of these 2 amounts While cash flows are fixed, market value is not interest rate and yield volatility how to simultaneously find yields and prices? 1/12/2016 Debt Instruments Robert B.H. Hauswald 28
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 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 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 informationFinance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation
Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation Lecture 5: Interest Rates and Bond Valuation Know the important bond features and bond types Understand bond values and why
More informationFIN Chapter 9. Debt Valuation and Interest Rates. Liuren Wu
FIN 3000 Chapter 9 Debt Valuation and Interest Rates Liuren Wu Overview 1. Overview of Corporate Debt Identify the key features of bonds and describe the difference between private and public debt markets.
More informationChapter 6. Bonds (Debt) Characteristics and Valuation
Chapter 6 Bonds (Debt) Characteristics and Valuation 1 Learning Outcomes Chapter 6 Describe the basic characteristics of debt and some of the different types of debt that exist. Discuss bond ratings and
More informationChapter 6. Interest Rates and Bond Valuation
Chapter 6 Interest Rates and Bond Valuation 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 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 8 Interest Rates and Bond Valuation
University of Science and Technology Beijing Dongling School of Economics and management Chapter 8 Interest Rates and Bond Valuation Oct. 2012 Dr. Xiao Ming USTB 1 Key Concepts and Skills Know the important
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 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 9 Contents. 1. Identify the key features of bonds and describe differences between private and public debt markets.
Chapter 9 Debt Valuation and Interest Rates Chapter 9 Contents Learning Objectives 1. Overview of Corporate Debt 1. Identify the key features of bonds and describe differences between private and public
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 informationBond Prices and Yields
142 Bond Characteristics Bond Prices and Yields Bonds are debt. Issuers are borrowers and holders are creditors. The indenture is the contract between the issuer and the bondholder. The indenture gives
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 informationChapter 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 informationUnderstanding 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 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 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 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 informationFIN 472 FixedIncome Securities Forward Rates
FIN 472 FixedIncome Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU InterestRate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward
More informationInvestment Analysis (FIN 670) Fall Homework 3
Investment Analysis (FIN 670) Fall 2009 Homework 3 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit You should make 2
More informationChapter 3 Fixed Income Securities
Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixedincome securities. Stocks. Real assets (capital budgeting). Part C Determination
More informationLEARNING OUTCOMES sources of return bond traditional yield measures reinvestment assumption reinvestment risk bond equivalent yield
LEARNING OUTCOMES 1. Describe the sources of return from investing in a bond. 2. Calculate and interpret traditional yield measures for fixedrate bonds and explain their limitations and assumptions. 3.
More informationDuration and convexity
Duration and convexity Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview... 1 A. Calculating the yield on a bond... 4 B. The yield curve... 6 C. Optionlike features... 8 D. Bond ratings...
More informationChapter 5. Topics in Chapter. Key Features of a Bond. Bonds, Bond Valuation, and Interest Rates
Chapter 5 Bonds, Bond Valuation, and Interest Rates 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Key Features of a Bond Par value: Face amount; paid at maturity.
More informationSolutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,
FIN 472 Professor Robert Hauswald FixedIncome 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 informationOutline. Main Features of Bonds. FixedIncome Securities. Professor Lasse H. Pedersen
FixedIncome Securities Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Outline Main features of bonds Yield to maturity Realized return Forward rates Yield curve or term structure of interest Prof.
More informationFIN 472 FixedIncome Securities Forward Rates
FIN 472 FixedIncome Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU InterestRate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward
More informationBonds. Finance 100. Prof. Michael R. Roberts. Topic Overview
Bonds Finance 100 Prof. Michael R. Roberts 1 Topic Overview Introduction to bonds and bond markets Zero coupon bonds» Valuation» YieldtoMaturity & Yield Curve» Spot Rates» Interest rate sensitivity DVO1
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 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 informationThe Classical Theory of Interest Duration and Volatility The Term Structure and YTM Explaining the Term Structure Allowing for the Risk of Default
Bonds, Duration and the Term Structure of Interest Rates The Classical Theory of Interest Duration and Volatility The Term Structure and YTM Explaining the Term Structure Allowing for the Risk of Default
More informationIntroduction to Bond Valuation. Types of Bonds
Introduction to Bond Valuation (Text reference: Chapter 5 (Sections 5.15.3, Appendix)) Topics types of bonds valuation of bonds yield to maturity term structure of interest rates more about forward rates
More informationYTM 9.993% 9.660% 8.995% 8.000% Time to Maturity
Fi8000 Valuation of Financial Assets Fall Semester 2009 Dr. Isabel Tkatch Assistant Professor of Finance Types of bonds Debt instruments Ratings of bonds (default risk) Spot and forward interest rate The
More informationChapter 9 Contents. 1. Identify the key features of bonds and describe differences between private and public debt markets.
Chapter 9 Debt Valuation and Interest Rates Chapter 9 Contents Learning Objectives 1. Overview of Corporate Debt 1. Identify the key features of bonds and describe differences between private and public
More informationANALYSIS 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 informationCHAPTER 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. Longterm Treasury
More informationChapter 6 Interest Rates and Bond Valuation
Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P61. P62. 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 informationSolutions to Chapter 6. Valuing Bonds
Solutions to Chapter 6 Valuing Bonds 1. a. Coupon rate = 6%, which remains unchanged. The coupon payments are fixed at $ per year. b. When the market yield increases, the bond price will fall. The cash
More informationChapter 3. Fixed Income Securities
IE 5441 1 Chapter 3. Fixed Income Securities IE 5441 2 Financial instruments: bills, notes, bonds, annuities, futures contracts, mortgages, options,...; assortments that are not real goods but they carry
More informationLongterm Debt and Lease Financing C H A P T E R S I X T E E N
Longterm Debt and Lease Financing C H A P T E R S I X T E E N Figure 161 Interest coverage  Canadian nonfinancial corporations PPT 161 Figure 162 Priority of claims Secured debt Senior Junior Unsecured
More informationChapter 6  Interest Rates
Chapter 6  Interest Rates Interest rates The determinants of interest rates Term structure of interest rates and yield curves What determines the shape of yield curves Other factors Interest rates Cost
More information4. D Spread to treasuries. Spread to treasuries is a measure of a corporate bond s default risk.
www.liontutors.com FIN 301 Final Exam Practice Exam Solutions 1. C Fixed rate par value bond. A bond is sold at par when the coupon rate is equal to the market rate. 2. C As beta decreases, CAPM will decrease
More informationChapter 8 Valuing Bonds
Chapter 8 Valuing Bonds Copyright 2011 Pearson Prentice Hall. All rights reserved. Chapter Outline 8.1 Bond Cash Flows, Prices, and Yields 8.2 Dynamic Behavior of Bond Prices 8.3 The Yield Curve and Bond
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 informationBonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage
Prof. Alex Shapiro Lecture Notes 12 Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage I. Readings and Suggested Practice Problems II. Bonds Prices and Yields (Revisited)
More informationChapter. Investing in Bonds. 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds. 2010 SouthWestern, Cengage Learning
Chapter 13 Investing in Bonds 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds 2010 SouthWestern, Cengage Learning Standards Standard 4.0 Investigate opportunities available for saving and investing.
More informationChapter 6 Bonds and Their Valuation ANSWERS TO ENDOFCHAPTER QUESTIONS
Chapter 6 Bonds and Their Valuation ANSWERS TO ENDOFCHAPTER QUESTIONS 61 With your financial calculator, enter the following: N = 10; I = YTM = 9%; PMT = 008 1,000 = 80; FV = 1000; PV = V B =? PV =
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 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 information13.4 Constructing a Bond Schedule. Amortization of Premium
480 9. A $5,000 bond with a coupon rate of 6% is redeemable on July 10, 018. It was purchased on December 7, 014 at a market quotation of 103.5. a. What was the quoted price of the bond? c. What is the
More informationLecture 5: Bond Valuation and Measuring Rate of Return on an Investment
Lecture 5: Bond Valuation and Measuring Rate of Return on an Investment Goals: Analyze bond price and yield rates. Discuss amortization of a bond. Introduce callable bond Study the internal rate of return
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 informationVALUATION 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 information7. Bonds and Interest rates
7. Bonds and Interest rates 1 2 Yields and rates I m thinking of buying a bond that has a face value of $1000, pays semiannual coupons of $40 and has 7 years to maturity. The market price is $943. Fixed
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 informationActuarial Society of India
Actuarial Society of India Examinations November 2006 CT1 Financial Mathematics Indicative Solution Q.1 I. An insurance company earned a simple rate of interest of 8% over the last calendar year based
More informationChapter Thirteen. Longterm Liabilities. Sources of Financing: Debt Versus Equity. Accounting for Longterm Liabilities: Bonds and Notes Payable
Chapter Thirteen Accounting for Longterm Liabilities: Bonds and Notes Payable Longterm Liabilities Learning Objectives 1. Understand the characteristics and advantages of LTD 2. Price a bond issuance
More informationValuation and Rates of Return C H A P T E R T E N
Valuation and Rates of Return C H A P T E R T E N Figure 101 / The relationship between time value of money, required return, cost of financing, and investment decisions PPT 101 Present value concepts
More informationFIN 683 Financial Institutions Management InterestRate Risk
FIN 683 Financial Institutions Management InterestRate Risk Professor Robert B.H. Hauswald Kogod School of Business, AU Interest Rate Risk FIs (financial institutions or intermediaries) face two core
More informationChapter 6  Interest Rates
Chapter 6  Interest Rates Interest rates The determinants of interest rates Term structure of interest rates and yield curves What determines the shape of yield curves Other factors Interest rates Cost
More informationYIELD CURVE GENERATION
1 YIELD CURVE GENERATION Dr Philip Symes Agenda 2 I. INTRODUCTION II. YIELD CURVES III. TYPES OF YIELD CURVES IV. USES OF YIELD CURVES V. YIELD TO MATURITY VI. BOND PRICING & VALUATION Introduction 3 A
More informationFixed Income Glossary
Fixed Income Glossary AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Accrued interest Ask price Asset backed Bank capital Basis point Bearer bond Bid Bond Bond swap Call Callable bonds Cap
More informationChapter 10. LongTerm Debt Financing. Albrecht, Stice, Stice, Swain
Chapter 10 LongTerm Debt Financing Albrecht, Stice, Stice, Swain COPYRIGHT 2008 Thomson SouthWestern, a part of The Thomson Corporation. Thomson, the Star logo, and SouthWestern are trademarks used
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 informationChapter 6: Discounted Cash Flow Valuation, Part II
Chapter 6: Discounted Cash Flow Valuation, Part II Faculty of Business Administration Lakehead University Spring 2003 May 13, 2003 Outline of the Lecture 6.2 Growing Annuities 6.3 Comparing Rates: The
More informationCHAPTER 14: BOND PRICES AND YIELDS
CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate for 3month Tbill: 4 100,000 4 1 = 1.02412 1 = 0.100 = 10.0% 97,645 b. Effective annual interest rate for coupon bond paying 5% semiannually:
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 informationSupplemental Instruction Finance 301: Porter Chapters 68 Exam 3
Supplemental Instruction Finance 301: Porter Chapters 68 Exam 3 Chapter Six: Interest Rates 1. What are the four most fundamental factors affecting the cost of money? Production opportunities the investment
More informationGlobal Financial Management
Global Financial Management Bond Valuation Copyright 999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part of this lecture may be reproduced without the permission
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 informationFUNDAMENTALS OF THE BOND MARKET
FUNDAMENTALS OF THE BOND MARKET Bonds are an important component of any balanced portfolio. To most they represent a conservative investment vehicle. However, investors purchase bonds for a variety of
More informationFIN 684 FixedIncome Analysis Approximating Price Changes: From Duration to Convexity Professor Robert B.H. Hauswald Kogod School of Business, AU
FIN 684 FiedIncome Analysis Approimating Price Changes: From Duration to Conveity Professor Robert B.H. Hauswald Kogod School of Business, AU From Yields to Their Analysis Review: discrete and continuous
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 informationChapter 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 informationFinancialInstitutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:
FIN 683 Professor Robert Hauswald FinancialInstitutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks  Interest Rate Risks 6. A financial institution has the following market
More informationFIN 350 Business Finance Homework 3 Fall 2014 Solutions
FIN 350 Business Finance Homework 3 Fall 014 Solutions 1. The yield to maturity of a $1,000 bond with a 7% coupon rate, semiannual coupons and two years to maturity is 7.6% APR, compounded semiannually.
More informationBackground of Thai Bond Market. Role of Bond Market
Background of Thai Bond Market Role of Bond Market Since the Asian financial crisis in 1997, bond has proven to be one of the major financial instruments. Bonds are generally divided into two major sectors,
More informationAnswers to EndofChapter Questions
Answers to EndofChapter Questions 1. The bond with a C rating should have a higher risk premium because it has a higher default risk, which reduces its demand and raises its interest rate relative to
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 informationEverything You Wanted to Know About Bonds and Their Value. What are bonds? Bond Terms. Bonds and Their Value. FINC 3610 Yost
Everything You Wanted to Know About Bonds and Their Value 133 What are bonds? Yost Corporation wants to borrow money, and it decides to issue bonds. Each bondholder lends the firm money today for 30 years
More informationChapter Nine Interest Rate Risk II
Chapter Nine Interest Rate Risk II Chapter Outline Introduction Duration: A Simple Introduction A General Formula for Duration The Duration of InterestBearing Bonds The Duration of a ZeroCoupon Bond
More informationFIN 472 FixedIncome Securities Corporate Debt Securities
FIN 472 FixedIncome Securities Corporate Debt Securities Professor Robert B.H. Hauswald Kogod School of Business, AU Corporate Debt Securities Financial obligations of a corporation that have priority
More informationYield Measures, Spot Rates & Forward Rates
Fixed Income Yield Measures, Spot Rates & Forward Rates Reading  57 www.proschoolonline.com/ 1 Sources of Return Coupon interest payment: Periodic coupon interest is paid on the par value of the bond
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 informationFIN 614 Time Value of Money. Professor Robert B.H. Hauswald Kogod School of Business, AU. 1/12/2011 Time Value of Money Robert B.H.
FIN 614 ime Value of Money Professor Robert B.H. Hauswald Kogod School of Business, AU 1/12/2011 ime Value of Money Robert B.H. Hauswald 1 ime Value of Money Business and financial planning revolves around
More informationChapter 4 Discounted Cash Flow Valuation
University of Science and Technology Beijing Dongling School of Economics and management Chapter 4 Discounted Cash Flow Valuation Sep. 2012 Dr. Xiao Ming USTB 1 Key Concepts and Skills Be able to compute
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 informationInvestments Analysis
Investments Analysis Last 2 Lectures: Fixed Income Securities Bond Prices and Yields Term Structure of Interest Rates This Lecture (#7): Fixed Income Securities Term Structure of Interest Rates Interest
More informationChapter 14. Bond Prices and Yields
Chapter 14 Bond Prices and Yields Bond Characteristics A bond is a security that is issued in connection with a borrowing arrangement. The borrower issues (i.e. sells) a bond to the lender for some amount
More informationChapter 5. Chapter 5 Topic Overview. Bond Characteristics
Chapter 5 Valuing Bonds Chapter 5 Topic Overview Bond Characteristics Reading Bond Quotes Annual and SemiAnnual Bond Valuation Finding Returns on Bonds Bond Risk and Other Important Bond Valuation Relationships
More informationInvestment Management Bond Portfolio Management
Investment Management Bond Portfolio Management Road Map Bond markets Bond Yields Bond Pricing: Zerocoupon bonds, Coupon bonds Price sensitivity Duration and Convexity The term structure of interest rates
More informationPrinciples of Managerial Finance. Lawrence J. Gitman Chad J. Zutter
Global edition Principles of Managerial Finance Fourteenth edition Lawrence J. Gitman Chad J. Zutter This page is intentionally left blank. 278 Part 3 Valuation of Securities Figure 6.2 Impact of Inflation
More informationCH 14 LONGTERM LIABILITIES SELFSTUDY QUESTIONS
C h 1 4 P a g e 1 CH 14 LONGTERM LIABILITIES SELFSTUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. Which of the following is
More informationSuggested Answers to Discussion Questions
Suggested Answers to Discussion Questions 1. Expectations hypothesis: The yield curve reflects investor expectations above all else. Future behavior of interest rates with respect to the present is affected
More informationAlliance 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 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 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 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 information