Bond Pricing Interest Rate Risk
|
|
- Edwina Quinn
- 7 years ago
- Views:
Transcription
1 Bond Pricing Interest Rate Risk
2 Measurement of Interest Rate Risk The most widely used measure of interest rate risk is the duration. A bond with a higher duration has higher interest rate risk. The duration approximately measures the sensitivity of the bond price to a given change in yield. The duration is an approximate measure as it assumes that the bond price is linear in yield changes. Because, in reality, the bond price is convex in the yield, the duration will be accurate only for small changes in yields.
3 Definition of Duration We will define the duration as the percentage change in the bond price for a given change in yield. Let D = Duration, then: D = (% change in bond price)/ change in yield
4 Mathematical Derivation of Duration for Zero Coupon Bond (1/2) We can easily derive the duration from the bond price formula by differentiating it. Consider a zero coupon bond with hface value equal to 100. LtB Let = bond price, y = yield ildto maturity, and T=maturity of bond. Then, assuming semi-annual compounding, we get the bond price as: B = 100/(1 + y/2) 2T
5 Mathematical Derivation of Duration for Zero Coupon Bond (2/2) Differentiating the bond price with respect to y, we get: db/dy = (-T) B/(1 + y/2) Therefore, from the definition of D, D = (db/b)/dy = -T/(1+y/2) We normally express the duration as a positive number, and the negative sensitivity of the bond to the change in yield is assumed. Notes: This measure of duration is also called the modified duration to differentiate it from the Macaulay duration. The Macaulay duration for the zero coupon bond is simply equal to (T).
6 Duration and the Maturity of the Bond Thus, the duration of the zero coupon bond (except for the adjustment in the denominator of (1+y/2)) is almost exactly equal to the maturity of the bond. In other words, a bond of maturity 10 years will be twice as risky as a bond of maturity 5 years, all else equal. The above statement will be approximately true even if bonds have different yields and coupons (although this may not be true if bonds have embedded options). o
7 Duration for Coupon Bonds We can extend the analysis to coupon bonds by considering i each cash flow of the bond as a separate zero coupon bond. Thus, viewing a coupon bond as a portfolio of zero coupon bonds, the duration will be the weighted average of the individual durations of each of the cash flows. The weights will be equal to [PV(cash flow)/total Value of Bond] The spreadsheet provides a detailed example of the computations involved.
8 Example of Use of Duration We can now use the duration to estimate the impact of a change in yield on the bond price. Consider a bond of maturity of exactly 2 years, coupon and yield equal to 5%. The price of this bond is 100. What would be the new bond price if the yield increases by 6%? This bond has a (modified) duration of Thus: the % change in bond price is equal to D x increase in yield = x 1% = %. If the yield increases from 5% to 6%, we expect the bond price to decline by 1.869% to The exact bond price for a yield of 6% is 98.14, so the duration gave us a reasonable answer.
9 Convexity y( (1/2) As noted earlier, the duration is an approximate measure of the actual % change bond change for a given change in yield. To get a more accurate measure of the price change, we can use the second risk measure called the convexity of the bond. The convexity measure the curvature of the bond, and when used along with the duration, allows for a more accurate measurement of bond interest rate risk. This is done as follows (denote convexity = C): % change in bond price = -D x (increase in yield) x C x (increase in yield)^2.
10 Convexity (2/2) Ui Using the spreadsheet, dh tthe bond used din our earlier example has a convexity of Thus, the impact of the convexity on the bond price is equal to 0.5 x x (change in yield)^2. For an increase in yield of 1%, this works out to 0.011%. Thus (combining i both the duration and convexity), for an increase in yield of 1%, we expect the % price change to be =-1% x (D=1.869%) x x (1%)^2 = % % = %. Thus, if interest rates increase from 5% to 6%, we expect the bond price to decrease to
Chapter Nine Selected Solutions
Chapter Nine Selected Solutions 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the
More informationFINANCIAL MATHEMATICS FIXED INCOME
FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Non-annual Payments)... 4 3. Conversion of Annual into
More information1. The Purdue Life Insurance Company has two assets and two liabilities.
Chapter 9, Section 1 1. The Purdue Life Insurance Company has two assets and two liabilities. The assets are: a. A 5 year par value bond with a maturity value of 100,000. The bond pays annual coupons at
More informationCHAPTER 16: MANAGING BOND PORTFOLIOS
CHAPTER 16: MANAGING BOND PORTFOLIOS PROBLEM SETS 1. While it is true that short-term rates are more volatile than long-term rates, the longer duration of the longer-term bonds makes their prices and their
More informationTIME 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
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 6. Variable interest rates and portfolio insurance. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam
More informationASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006
1 ASSET LIABILITY MANAGEMENT Significance and Basic Methods Dr Philip Symes Introduction 2 Asset liability management (ALM) is the management of financial assets by a company to make returns. ALM is necessary
More informationFixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods
Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods Philip H. Dybvig Washington University in Saint Louis Matching maturities Duration Effective duration Multiple
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 informationCoupon 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
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 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 informationFixed Income: Practice Problems with Solutions
Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.
More informationPractice Questions for Midterm II
Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is
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 informationSolutions to Practice Questions (Bonds)
Fuqua Business School Duke University FIN 350 Global Financial Management Solutions to Practice Questions (Bonds). These practice questions are a suplement to the problem sets, and are intended for those
More informationM.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.
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 informationDuration Gap Analysis
appendix 1 to chapter 9 Duration Gap Analysis An alternative method for measuring interest-rate risk, called duration gap analysis, examines the sensitivity of the market value of the financial institution
More informationPractice Set #3 and Solutions.
FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #3 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,
More informationVALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below
VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective
More informationDistinguishing duration from convexity
Distinguishing duration from convexity Vanguard research May 010 Executive summary. For equity investors, the perception of risk is generally straightforward: Market risk the possibility that prices may
More informationClick Here to Buy the Tutorial
FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following
More informationNPV Versus IRR. W.L. Silber -1000 0 0 +300 +600 +900. We know that if the cost of capital is 18 percent we reject the project because the NPV
NPV Versus IRR W.L. Silber I. Our favorite project A has the following cash flows: -1 + +6 +9 1 2 We know that if the cost of capital is 18 percent we reject the project because the net present value is
More informationZero-Coupon Bonds (Pure Discount Bonds)
Zero-Coupon Bonds (Pure Discount Bonds) The price of a zero-coupon bond that pays F dollars in n periods is F/(1 + r) n, where r is the interest rate per period. Can meet future obligations without reinvestment
More informationYield to Maturity Outline and Suggested Reading
Yield to Maturity Outline Outline and Suggested Reading Yield to maturity on bonds Coupon effects Par rates Buzzwords Internal rate of return, Yield curve Term structure of interest rates Suggested reading
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 informationNotes for Lecture 2 (February 7)
CONTINUOUS COMPOUNDING Invest $1 for one year at interest rate r. Annual compounding: you get $(1+r). Semi-annual compounding: you get $(1 + (r/2)) 2. Continuous compounding: you get $e r. Invest $1 for
More informationI. 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
More informationInterest Rate Futures. Chapter 6
Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant
More informationTIME 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
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 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity
More information2 The Mathematics. of Finance. Copyright Cengage Learning. All rights reserved.
2 The Mathematics of Finance Copyright Cengage Learning. All rights reserved. 2.3 Annuities, Loans, and Bonds Copyright Cengage Learning. All rights reserved. Annuities, Loans, and Bonds A typical defined-contribution
More informationUnderstanding duration and convexity of fixed income securities. Vinod Kothari
Understanding duration and convexity of fixed income securities Vinod Kothari Notation y : yield p: price of the bond T: total maturity of the bond t: any given time during T C t : D m : Cashflow from
More informationChapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship
More informationACI 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
More informationissue brief Duration Basics January 2007 Duration is a term used by fixed-income investors, California Debt and Investment Advisory Commission
issue brief California Debt and Investment Advisory Commission # 06-10 January 2007 Duration Basics Introduction Duration is a term used by fixed-income investors, financial advisors, and investment advisors.
More informationDuration and Bond Price Volatility: Some Further Results
JOURNAL OF ECONOMICS AND FINANCE EDUCATION Volume 4 Summer 2005 Number 1 Duration and Bond Price Volatility: Some Further Results Hassan Shirvani 1 and Barry Wilbratte 2 Abstract This paper evaluates the
More information550.444 Introduction to Financial Derivatives
550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter
More informationCHAPTER 5 HOW TO VALUE STOCKS AND BONDS
CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used
More informationProblems and Solutions
Problems and Solutions CHAPTER Problems. Problems on onds Exercise. On /04/0, consider a fixed-coupon bond whose features are the following: face value: $,000 coupon rate: 8% coupon frequency: semiannual
More informationThe University of Iowa and CFA Society of Iowa. Fixed Income Portfolio Management
The University of Iowa and CFA Society of Iowa Fixed Income Portfolio Management Calvin W. Norris, CFA Portfolio Manager and Interest Rate Strategist Aegon USA Investment Management, LLC www.aegoninvestments.com
More informationIntroduction. example of a AA curve appears at the end of this presentation.
1 Introduction The High Quality Market (HQM) Corporate Bond Yield Curve for the Pension Protection Act (PPA) uses a methodology developed at Treasury to construct yield curves from extended regressions
More informationInterest Rate Risk in The Banking Book (IRRBB) JOHN N.CHALOUHI Chief Risk Officer, FNB group
Interest Rate Risk in The Banking Book (IRRBB) JOHN N.CHALOUHI Chief Risk Officer, FNB group Table of Contents I. Interest Rate Risk in the Banking Book 1. Overview 2. Banking Book v/s Trading Book 3.
More informationTake-Home Problem Set
Georgia State University Department of Finance MBA 8622 Fall 2001 MBA 8622: Corporation Finance Take-Home Problem Set Instructors: Lalitha Naveen, N. Daniel, C.Hodges, A. Mettler, R. Morin, M. Shrikhande,
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. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination
More informationHow To Calculate Bond Price And Yield To Maturity
CHAPTER 10 Bond Prices and Yields Interest rates go up and bond prices go down. But which bonds go up the most and which go up the least? Interest rates go down and bond prices go up. But which bonds go
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 5. Bonds. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall 2009 Edition,
More informationThis paper is not to be removed from the Examination Halls
~~FN3023 ZB d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON FN3023 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences,
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. Option-like features... 8 D. Bond ratings...
More informationFinancial Mathematics for Actuaries. Chapter 8 Bond Management
Financial Mathematics for Actuaries Chapter 8 Bond Management Learning Objectives 1. Macaulay duration and modified duration 2. Duration and interest-rate sensitivity 3. Convexity 4. Some rules for duration
More informationFinancial and Investment Mathematics. Dr. Eva Cipovová Department of Business Management Email: evacipovova@gmail.com
Financial and Investment Mathematics Dr. Eva Cipovová Department of Business Management Email: evacipovova@gmail.com Content 1. Interest and annual interest rate. Simple and compound interest, frequency
More informationQuestions and Answers
Appendix J 1 Series EE Savings Bonds Issued May 2005 and Thereafter What interest rate does a Series EE bond earn? Series EE savings bonds issued on and after May 1, 2005, will earn a fixed rate of interest,
More informationCHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING
CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;
More 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 informationCurrent Yield Calculation
Current Yield Calculation Current yield is the annual rate of return that an investor purchasing a security at its market price would realize. Generally speaking, it is the annual income from a security
More informationBond Pricing Fundamentals
Bond Pricing Fundamentals Valuation What determines the price of a bond? Contract features: coupon, face value (FV), maturity Risk-free interest rates in the economy (US treasury yield curve) Credit risk
More informationDebt Instruments Set 3
Debt Instruments Set 3 Backus/February 9, 1998 Quantifying Interest Rate Risk 0. Overview Examples Price and Yield Duration Risk Management Convexity Value-at-Risk Active Investment Strategies Debt Instruments
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 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 informationThe Time Value of Money
The Time Value of Money This handout is an overview of the basic tools and concepts needed for this corporate nance course. Proofs and explanations are given in order to facilitate your understanding and
More informationCALCULATOR TUTORIAL. Because most students that use Understanding Healthcare Financial Management will be conducting time
CALCULATOR TUTORIAL INTRODUCTION Because most students that use Understanding Healthcare Financial Management will be conducting time value analyses on spreadsheets, most of the text discussion focuses
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 long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations
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 information10. Fixed-Income Securities. Basic Concepts
0. Fixed-Income Securities Fixed-income securities (FIS) are bonds that have no default risk and their payments are fully determined in advance. Sometimes corporate bonds that do not necessarily have certain
More informationCHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is
More informationChapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices
196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its
More informationMoney 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
More informationInterest 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
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
More informationBond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows
Bond Valuation Chapter 7 Bonds, Bond Valuation, and Interest Rates Valuing the cash flows (1) coupon payment (interest payment) = (coupon rate * principal) usually paid every 6 months (2) maturity value
More 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. Long-term Treasury securities have substantial
More informationMaturity targeted Bond Funds Lock in Anticipated Yield to Maturity
Winter 11 Maturity targeted Bond Funds Lock in Anticipated Yield to Maturity How fund dinvestors can benefit fitfrom the permanence and definition of portfolios of bonds, held to their maturity. Matthew
More informationPERPETUITIES NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS
NARRATIVE SCRIPT 2004 SOUTH-WESTERN, A THOMSON BUSINESS NARRATIVE SCRIPT: SLIDE 2 A good understanding of the time value of money is crucial for anybody who wants to deal in financial markets. It does
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 Rate Swaps. Key Concepts and Buzzwords. Readings Tuckman, Chapter 18. Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps
Interest Rate Swaps Key Concepts and Buzzwords Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps Readings Tuckman, Chapter 18. Counterparty, Notional amount, Plain vanilla swap, Swap rate Interest
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 informationCalculations for Time Value of Money
KEATMX01_p001-008.qxd 11/4/05 4:47 PM Page 1 Calculations for Time Value of Money In this appendix, a brief explanation of the computation of the time value of money is given for readers not familiar with
More informationIntroduction to swaps
Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald
More information, plus the present value of the $1,000 received in 15 years, which is 1, 000(1 + i) 30. Hence the present value of the bond is = 1000 ;
2 Bond Prices A bond is a security which offers semi-annual* interest payments, at a rate r, for a fixed period of time, followed by a return of capital Suppose you purchase a $,000 utility bond, freshly
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 informationMortgage-Backed Securities. Mortgage Loans Pass-throughs and Prepayments CMOs Analysis of MBS Pricing and Convexity
Mortgage-Backed Securities/1 Asset-Backed Securities Mortgage-Backed Securities Prof. Ian Giddy Stern School of Business New York University Mortgages and MBS Mortgage Loans Pass-throughs and Prepayments
More informationEFFECTIVE INTEREST RATE METHOD AMORTIZATION
EFFECTIVE INTEREST RATE METHOD AMORTIZATION BACKGROUND NI 81-106 requires disclosure of interest income If interest income disclosed IAS 39 requires the use of the effective interest rate (EIR) method
More informationCHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future
More informationINTEREST RATE SWAPS September 1999
INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:
More informationCHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future
More informationECO 317 Economics of Uncertainty Fall Term 2009 Week 5 Precepts October 21 Insurance, Portfolio Choice - Questions
ECO 37 Economics of Uncertainty Fall Term 2009 Week 5 Precepts October 2 Insurance, Portfolio Choice - Questions Important Note: To get the best value out of this precept, come with your calculator or
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 informationEQUITY LINKED NOTES: An Introduction to Principal Guaranteed Structures Abukar M Ali October 2002
EQUITY LINKED NOTES: An Introduction to Principal Guaranteed Structures Abukar M Ali October 2002 Introduction In this article we provide a succinct description of a commonly used investment instrument
More informationModels of Risk and Return
Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for
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 Short-Term Debt (Short-Term Loans, Line of
More informationHow To Value A Bond In Excel
Financial Modeling Templates http://spreadsheetml.com/finance/bondvaluationyieldtomaturity.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any
More informationIf I offered to give you $100, you would probably
File C5-96 June 2013 www.extension.iastate.edu/agdm Understanding the Time Value of Money If I offered to give you $100, you would probably say yes. Then, if I asked you if you wanted the $100 today or
More informationEstimating Risk free Rates. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012. Adamodar@stern.nyu.
Estimating Risk free Rates Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 Adamodar@stern.nyu.edu Estimating Risk free Rates Models of risk and return in finance start
More informationRate of Return. Reading: Veronesi, Chapter 7. Investment over a Holding Period
Rate of Return Reading: Veronesi, Chapter 7 Investment over a Holding Period Consider an investment in any asset over a holding period from time 0 to time T. Suppose the amount invested at time 0 is P
More informationUNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 5ed. Time Value Analysis
This is a sample of the instructor resources for Understanding Healthcare Financial Management, Fifth Edition, by Louis Gapenski. This sample contains the chapter models, end-of-chapter problems, and end-of-chapter
More informationA) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%
1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.
More informationTime Value of Money 1
Time Value of Money 1 This topic introduces you to the analysis of trade-offs over time. Financial decisions involve costs and benefits that are spread over time. Financial decision makers in households
More informationLikewise, the payoff of the better-of-two note may be decomposed as follows: Price of gold (US$/oz) 375 400 425 450 475 500 525 550 575 600 Oil price
Exchange Options Consider the Double Index Bull (DIB) note, which is suited to investors who believe that two indices will rally over a given term. The note typically pays no coupons and has a redemption
More information