# Overview of Lecture 5 (part of Lecture 4 in Reader book)

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 Overview of Lecture 5 (part of Lecture 4 in Reader book) Bond price listings and Yield to Maturity Treasury Bills Treasury Notes and Bonds Inflation, Real and Nominal Interest Rates M. Spiegel and R. Stanton,

2 Bonds: review A bond is defined by its maturity date, coupon rate, and face (par) value. The bond makes coupon payments every 6 months until maturity. Each coupon payment = ½ (coupon rate)(face value) The face value is paid out at the maturity date (together with the last coupon payment). M. Spiegel and R. Stanton,

3 Treasury Bills Treasury Bills are issued by the US Treasury, with 3 months, 6 months and 1 year to maturity 3 and 6 month Bills usually auctioned weekly. 1 year Bills usually auctioned monthly. Treasury Bills are zero coupon bonds. You pay for them today, and receive the face value, usually \$10,000, at maturity. Bond prices are quoted relative to a \$100 face value» E.g. the quoted price is for 1/100 of a T-Bill M. Spiegel and R. Stanton,

4 T-Bill Listings (WSJ, Friday 9/8/00) The bid price (at which you can sell) and ask price (at which you can buy) are quoted as a discount from the face value, d. Are these true interest rates? What about the Ask Yield? M. Spiegel and R. Stanton,

5 Treasury Bills: Discount Given the quoted discount, we can calculate the price: n d P = E.g. the bill with maturity 27 days, quoted (ask) discount 5.88%, has price equal to n d P = = = \$ Remember: this is the price per \$100 principal. So for 1 bill you d pay x 10,000/100 = \$9, M. Spiegel and R. Stanton,

6 Treasury Bills: True Interest Rate The interest rate over the next 27 days is (1+r 27 day ) = 100. I.e. r 27 day = 100/ = 0.443%. This can be converted to an annual interest rate: 1+r annual = (1+r 27 day ) 365/27 = r annual = 6.16% Thus, the true (effective) annual interest rate is slightly higher than the quoted discount rate. M. Spiegel and R. Stanton,

7 Treasury Bills: Yield The Ask Yield quoted in the paper is based on the ask price: ( ask P ) d y = =. ask n P 1 nd 360 For our bill, y = 365/27 x ( ) / = 5.99%. This is larger than the discount, but also smaller than the true interest rate. Note that (100 P ask )/P ask is the true n-day interest rate It s then converted to an annual rate by multiplying by 365/n, rather than raising to the power of 365/n M. Spiegel and R. Stanton,

8 Powerpoint Treasury Bill Calculator Enter T-Bill quotes from the Wall Street Journal: Maturity Days Bid Asked Chg Ask Yld Oct 05 ' Price, P ask = 100 x (1 nd / 360) = True r = (100 P) / P = Annual r A = (1 + r) 365/n = Ask yield, y = (365/n) x (100 P) / P = M. Spiegel and R. Stanton,

9 Treasury Notes and Bonds Treasury Notes and Treasury Bonds are coupon paying bonds issued by the US government. The only difference is maturity: Notes have more than 1, and up to 10 yrs. to maturity. Bonds have more than 10, and up to 30, yrs. to maturity Coupon payments are made every 6 months. M. Spiegel and R. Stanton,

10 Treasury Bond and Note Listings (WSJ, Friday 9/8/00) Prices are quoted in 32nds of a dollar. E.g. 138:01 means \$ /32 = \$ Quoted ( clean ) prices are not the actual prices you pay. You have to add accrued interest M. Spiegel and R. Stanton,

11 Accrued Interest If t 0 is the date of the last coupon payment, t 1 the date of the next payment, and t is today's date, t t 0 Accrued interest = coupon payment t1 t 0 For our bond, last coupon was May 15, days ago as of September 8, Next coupon is November 15, days after May 15. Accrued interest = (116 / 184) x (9.875 / 2) = \$ Price you d actually pay = \$ \$ = \$ M. Spiegel and R. Stanton,

12 Yield to Maturity The Ask Yield column show s the bond s yield to maturity (YTM). For annual coupon paying bonds, YTM solves the following equation for y C1 C2 C3 Bond Price = where the C s are the bond s cash payments. For semi-annual coupon paying bonds, it is standard to quote the yield as an APR compounded semiannually: Bond Price = 1+ y C6 m 1+ y/2 + 2 ( 1+ y) ( 1+ y) 2 ( 1+ y/2) ( 1+ y/2) Some of you may recognize that the YTM equals the internal rate of return (IRR) for the bond. C 1y + 3 C 18m M. Spiegel and R. Stanton,

13 Yield to Maturity The YTM represents (roughly) the average return to an investor that purchases the bond and holds it until maturity. However, the YTM is not a spot or forward interest rate. Spot and forward interest rates relate to investments with just 2 cash flows: at the start date and at the end date. The bond, however, has a sequence of cash flows. The YTM is a sort of weighted average of the spot rates. The weights depend (roughly) on the size of the coupon payments and the number of periods until maturity. What is the YTM of a zero coupon bond? Though commonly quoted, it is not a very useful measure Only relevant for one bond. See BM p. 677 for warnings regarding YTM. M. Spiegel and R. Stanton,

14 Real interest rates, nominal interest rates and inflation A nominal cash flow is simply the number of dollars you pay out or receive. A \$1 nominal cash flow will have different purchasing power at different dates due to price level changes. A real cash flow is adjusted for inflation. A real dollar always has the same purchasing power. \$1 real equals \$1 nominal today. M. Spiegel and R. Stanton,

15 Converting between Real and Nominal cash flows To convert a nominal cash flow to a real cash flow, we need to adjust for the decrease in purchasing power: Real cash flow = Nominal cash flow/(1 + inflation rate) t E.g. BM Example p. 48: If you invest \$1,000 today at 10%, your nominal payout in 20 years will be \$ (=1000(1.10) 20 ). If the inflation rate over this period is 6% annually, then the real value will be \$ (= / ). M. Spiegel and R. Stanton,

16 Converting between Real and Nominal interest rates In this example, what was the real return? ( /1000) 1/20 1 = 3.77% Note that equals 1.1 / General rule (see reader p. 33 for derivation): (1+r real )(1+i) = 1+r» In our example, (1.0377)(1.06) = Equivalently, r real = (r i)/(1+i). NOT r real = (r i), though it s approximately correct. M. Spiegel and R. Stanton,

17 Discounting Real and Nominal Cash Flows The Rule: Always discount real cash flows with the real interest rate. Always discount nominal cash flows with the nominal interest rate. M. Spiegel and R. Stanton,

18 Real and Nominal Discounting: Reader Example P. 34 Real interest rate: r nominal = 12%; inflation rate = 8% Compute r real = (r nominal - i)/(1 + i) =.04/1.08 = = 3.7%. Cash flows: C 0 = -100; C 1 = 50; C 2, C 3 growing at inf. rate. Nominal: C 2 = 50(1+.08) =54; C 3 =50(1.08) 2 = Real: C 1 =50/1.08=46.3; C 2 = C 3 =46.3 What is the NPV? 1) Discount nominal cash flows with nominal rate: NPV = / / / = ) Discount real cash flows with real interest rate: NPV = / / / = M. Spiegel and R. Stanton,

### Overview of Lecture 4

Overview of Lecture 4 Examples of Quoted vs. True Interest Rates Banks Auto Loan Forward rates, spot rates and bond prices How do things change when interest rates vary over different periods? Present

### Money Market and Debt Instruments

Prof. Alex Shapiro Lecture Notes 3 Money Market and Debt Instruments I. Readings and Suggested Practice Problems II. Bid and Ask III. Money Market IV. Long Term Credit Markets V. Additional Readings Buzz

### 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

### CHAPTER 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

### 2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04)

Lecture 4 1 Bond valuation Exercise 1. A Treasury bond has a coupon rate of 9%, a face value of \$1000 and matures 10 years from today. For a treasury bond the interest on the bond is paid in semi-annual

### Chapter 6 Valuing Bonds. (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months.

Chapter 6 Valuing Bonds Bond Valuation - value the cash flows (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months. (2) maturity value = principal or par value

### 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.

### Investment Yield Formulas and Yield Case Studies

Investment Yield Formulas and Yield Case Studies Presented by : Gary Porter, C.F.A. Vice President Capital Management of the Carolinas, LLC distributors of the North Carolina Capital Management Trust Email:

### Prepared by: Dalia A. Marafi Version 2.0

Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC-200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version

### HEC Paris MBA Program. Financial Markets Prof. Laurent E. Calvet Fall 2010 MIDTERM EXAM. 90 minutes Open book

HEC Paris MBA Program Name:... Financial Markets Prof. Laurent E. Calvet Fall 2010 MIDTERM EXAM 90 minutes Open book The exam will be graded out of 100 points. Points for each question are shown in brackets.

### 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

### 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

### 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

### 7. 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

### 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

### 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

### Chapter Review Problems

Chapter Review Problems State all stock and bond prices in dollars and cents. Unit 14.1 Stocks 1. When a corporation earns a profit, the board of directors is obligated by law to immediately distribute

### Review Solutions FV = 4000*(1+.08/4) 5 = \$4416.32

Review Solutions 1. Planning to use the money to finish your last year in school, you deposit \$4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen

### 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

### Yield 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

### 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

### 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

### BUSINESS FINANCE (FIN 312) Spring 2009

BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to

### Practice Set and Solutions #2

723G26/2012-10-10 Practice Set and Solutions #2 What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These

### Exercise 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

### Chapter 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

### VALUE 11.125%. \$100,000 2003 (=MATURITY

NOTES H IX. How to Read Financial Bond Pages Understanding of the previously discussed interest rate measures will permit you to make sense out of the tables found in the financial sections of newspapers

### 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

### 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

### Overview of Lecture 9

Overview of Lecture 9 Taxes The Tax Code Calculating after-tax cash flows What Discount Rate to Use? Materials covered: Reader, Lecture 7 BM Chapter 6, pp. 121-134. M. Spiegel and R. Stanton, 2000 1 Review:

### Lecture Notes to Accompany Brealey and Myers Principles of Corporate Finance

Lecture Notes to Accompany Brealey and Myers Principles of Corporate Finance by Matthew Spiegel Yale School of Management Box 208200 New Haven, CT 06520-8200 matthew.spiegel@yale.edu and Richard Stanton

### 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

Review for Exam 2 Instructions: Please read carefully The exam will have 20 multiple choice questions and 4 work problems. Questions in the multiple choice section will be either concept or calculation

### 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;

### 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

### 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

### 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

### Interest rate Derivatives

Interest rate Derivatives There is a wide variety of interest rate options available. The most widely offered are interest rate caps and floors. Increasingly we also see swaptions offered. This note will

### Investment and Portfolio Management. Lecture 8 Bond Prices and Yields. Bond Characteristics

Investment and Portfolio Management Ms. Pham Le Thu Nga Lecture 8 Bond Prices and Yields Chapter 14 14-2 Bond Characteristics Face or par value (normally bullet maturity) Coupon rate (normally fixed) Zero

### Calculation Convention for Inflation Linked Bond

Calculation Convention for Inflation Linked Bond Bond Pricing and Product Development The Thai Bond Market Association (ThaiBMA) Introduction In May 0, Thai bond market will probably have a new type of

### 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

### 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

### Fixed-income Securities Lecture 3: Yield curves. Connecting various yield curves: intuition

Philip H. Dybvig Washington University in Saint Louis The term structure of interest rates Fixed-income Securities Lecture 3: Yield curves Relations among yield curves: intuition Conventions and complications

### Coupon Bonds and Zeroes

Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zero-coupon bonds Bond replication No-arbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semi-annual compounding

### 1. If the opportunity cost of capital is 14 percent, what is the net present value of the factory?

MØA 155 - Fall 2011 PROBLEM SET: Hand in 1 Exercise 1. An investor buys a share for \$100 and sells it five years later, at the end of the year, at the price of \$120.23. Each year the stock pays dividends

### Fixed Income Knowledge Series 2. Characteristics and Pricing of Government Bonds

Fixed Income Knowledge Series 2 Characteristics and Pricing of Government Bonds Government bonds are fixed income securities issued by the Government of India (GOI). The total outstanding bonds issued

### 380.760: Corporate Finance. Financial Decision Making

380.760: Corporate Finance Lecture 2: Time Value of Money and Net Present Value Gordon Bodnar, 2009 Professor Gordon Bodnar 2009 Financial Decision Making Finance decision making is about evaluating costs

### In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities,

2 Treasury Securities In this chapter we will learn about Treasury Bills, Treasury Notes and Bonds, Strips, Treasury Inflation Protected Securities, and a few other products including Eurodollar deposits.

### CONSUMER PRICE INDEX (CPI) INDEXED GOVERNMENT BONDS

REPUBLIC OF TURKEY PRIME MINISTRY UNDERSECRETARIAT OF TREASURY CONSUMER PRICE INDEX (CPI) INDEXED GOVERNMENT BONDS INVESTORS GUIDE DECEMBER 2009 TABLE OF CONTENTS I. GENERAL ISSUES... 1 II. TERMS OF THE

### 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

### Note: There are fewer problems in the actual Midterm Exam!

HEC Paris Practice Midterm Exam Questions Version with Solutions Financial Markets BS Fall 200 Note: There are fewer problems in the actual Midterm Exam! Problem. Is the following statement True, False

### 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

Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

### 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

### 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

### 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

### Chapter 16 - Immunization

Chapter 16 - Immunization ANSWERS TO QUESTIONS & PROBLEMS 16-1: A. The duration of the assets can be set to a minimum of 1 year (100% in 1 year 7% bonds) and to a maximum of 2.78 years (100% in 3 year

### Introduction to Bonds

Bonds are a debt instrument, where the bond holder pays the issuer an initial sum of money known as the purchase price. In turn, the issuer pays the holder coupon payments (annuity), and a final sum (face

### TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND

TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This assignment will focus on using the TI - 83 to calculate the price of a Zero

### Figure 10.1 Listing of Treasury Issues

CHAPER 10 Bond Prices and Yields 10.1 BOND CHARACERISICS Bond Characteristics reasury Notes and Bonds Face or par value Coupon rate Zero coupon bond Compounding and payments Accrued Interest Indenture

### Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 8th Edition, Copyright John C. Hull

Chapter 4 Interest Rates 1 Types of Rates Treasury rates LIBOR rates Repo rates 2 Treasury Rates Rates on instruments issued by a government in its own currency 3 LIBOR and LIBID LIBOR is the rate of interest

### YIELD 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

### BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

### US 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

### CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

### Yield-bearing Financial Assets

Yield-bearing Financial Assets (YBFAs) The quiet market (until lately) (c) 2009-2013, Gary R. Evans. May be used only for non-profit educational purposes only without permission of the author. Primary

### Chapter 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

### Chapter 4 Interest Rates. Options, Futures, and Other Derivatives 9th Edition, Copyright John C. Hull

Chapter 4 Interest Rates 1 Types of Rates! Treasury rate! LIBOR! Fed funds rate! Repo rate 2 Treasury Rate! Rate on instrument issued by a government in its own currency 3 LIBOR! LIBOR is the rate of interest

### TECHNICAL DESCRIPTION OF FEDERAL TREASURY NOTES

TECHNICAL DESCRIPTION OF FEDERAL TREASURY NOTES 1. INTRODUCTION Federal Treasury Notes (PAGAFES) were dollar-denominated credit certificates which obliged the Federal Government to pay a sum in local currency

### Chapter 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

### M.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary

M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.

### 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

### Bonds calculations. Description. Cash flows. Zero coupons. Yield. Yield to call. Price and yield relationship. Yield curve pricing

4 Bonds calculations Description Cash flows Zero coupons Yield Yield to call Price and yield relationship Yield curve pricing Other yield measures Yield measures Exercise Summary File: MFME2_04.xls 43

### Lecture 15: Final Topics on CAPM

Lecture 15: Final Topics on CAPM Final topics on estimating and using beta: the market risk premium putting it all together Final topics on CAPM: Examples of firm and market risk Shorting Stocks and other

### Practice Set #1 and Solutions.

Bo Sjö 14-05-03 Practice Set #1 and Solutions. What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These sets

Chapter Interest Rates McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Interest Rates Our goal in this chapter is to discuss the many different interest rates that

### 3. Time value of money. We will review some tools for discounting cash flows.

1 3. Time value of money We will review some tools for discounting cash flows. Simple interest 2 With simple interest, the amount earned each period is always the same: i = rp o where i = interest earned

### Description. Investment Project. Common Stock. Some Portfolio Assets for Investment Project. Econ 422 Summer 2007 Eric Zivot July 25, 2007

Investment Project Econ 422 Summer 2007 Eric Zivot July 25, 2007 Description Objectives: learn financial institutions and conventions Essential features:» Create a \$100,000 portfolio, describe it in Report

### 7: Compounding Frequency

7.1 Compounding Frequency Nominal and Effective Interest 1 7: Compounding Frequency The factors developed in the preceding chapters all use the interest rate per compounding period as a parameter. This

### 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

### Investments 320 Dr. Ahmed Y. Dashti Chapter 3 Interactive Qustions

Investments 320 Dr. Ahmed Y. Dashti Chapter 3 Interactive Qustions 3-1. A primary asset is an initial offering sold by a business, or government, to raise funds. A) True B) False 3-2. Money market instruments

### Introduction 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

### TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction

TIME VALUE OF MONEY #6: TREASURY BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This problem assumes that you have mastered problems 1-5, which are prerequisites. In this

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

### 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

### 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

University of Virginia - math1140: Financial Mathematics Fall 2011 Exam 1 7:00-9:00 pm, 26 Sep 2011 Honor Policy. For this exam, you must work alone. No resources may be used during the quiz. The only

### 3. Time value of money

1 Simple interest 2 3. Time value of money With simple interest, the amount earned each period is always the same: i = rp o We will review some tools for discounting cash flows. where i = interest earned

### Chapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1

Chapter 6 Key Concepts and Skills Be able to compute: the future value of multiple cash flows the present value of multiple cash flows the future and present value of annuities Discounted Cash Flow Valuation

### Section 8.3 Notes- Compound Interest

Section 8.3 Notes- Compound The Difference between Simple and Compound : Simple is paid on your investment or principal and NOT on any interest added Compound paid on BOTH on the principal and on all interest

### Methods for Project Evaluation

Methods for Project Evaluation March 8, 2004 1 Alternative Methods Present worth (PW) method Future worth (FW) method Annual worth (AW) method Benefit-cost ratio (BC) method Internal rate of return (IRR)

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

### ACI THE FINANCIAL MARKETS ASSOCIATION

ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARD-FORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE

### Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a \$100 face value. What is the most the investor would pay for 2. An

### Bonds 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)

### Investment 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

### Finance 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