Bond Valuation. Capital Budgeting and Corporate Objectives

Size: px
Start display at page:

Download "Bond Valuation. Capital Budgeting and Corporate Objectives"

Transcription

1 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 are they? Some examples Zero coupon bonds» Valuation» Interest rate sensitivity Coupon bonds» Valuation» Interest rate sensitivity The term structure of interest rates 2 1 1

2 What is a Bond? A bond is a security that obligates the issuer to make specified interest and principal payments to the holder on specified dates.» Coupon rate» Face value (or par)» Maturity (or term) Bonds are also called fixed income securities. Bonds differ in several respects:» Repayment type» Issuer» Maturity» Security» Priority in case of default 3 Repayment Schemes Pure Discount or Zero-Coupon Bonds» Pay no coupons prior to maturity.» Pay the bond s face value at maturity. Coupon Bonds» Pay a stated coupon at periodic intervals prior to maturity.» Pay the bond s face value at maturity. Floating-Rate Bonds» Pay a variable coupon, reset periodically to a reference rate.» Pay the bond s face value at maturity. Perpetual Bonds (Consols)» No maturity date.» Pay a stated coupon at periodic intervals. Annuity or Self-Amortizing Bonds» Pay a regular fixed amount each payment period.» Principal repaid over time rather than at maturity

3 Types of Bonds: Issuers Bonds Issuer Government Bonds US Treasury, Government Agencies Mortgage-Backed Securities Government agencies (FNMA etc) Municipal Bonds State and local government Corporate Bonds Corporations Asset-Back Securities Corporations 5 U.S. Government Bonds Treasury Bills» No coupons (zero coupon security)» Face value paid at maturity» Maturities up to one year Treasury Notes» Coupons paid semiannually» Face value paid at maturity» Maturities from 2-10 years 6 3 3

4 U.S. Government Bonds (Cont.) Treasury Bonds» Coupons paid semiannually» Face value paid at maturity» Maturities over 10 years» The 30-year bond is called the long bond. Treasury Strips» Zero-coupon bond» Created by stripping the coupons and principal from Treasury bonds and notes. No default risk. Considered to be risk free. Exempt from state and local taxes. Sold regularly through a network of primary dealers. Traded regularly in the over-the-counter market. 7 Agency and Municipal Bonds Agency bonds: mortgage-backed bonds» Bonds issued by U.S. Government agencies that are backed by a pool of home mortgages.» Self-amortizing bonds. (mostly monthly payments)» Maturities up to 30 years.» Prepayment risk. Municipal bonds» Maturities from one month to 40 years.» Usually exempt from federal, state, and local taxes.» Generally two types: Revenue bonds General Obligation bonds» Riskier than U.S. Government bonds

5 Corporate Bonds Bonds issued by corporations» Bonds vs. Debentures» Fixed-rate versus floating-rate bonds.» Investment-grade vs. Below investment-grade bonds.» Additional features: call provisions convertible bonds puttable bonds 9 Seniority of Corporate Bonds In case of default, different classes of bonds have different claim priority on the assets of a corporation. Secured Bonds (Asset-Backed)» Secured by real property.» Ownership of the property reverts to the bondholders upon default. Debentures» Same priority as general creditors.» Have priority over stockholders, but subordinate to secured debt

6 Bond Ratings Moody s S&P Quality of Issue Aaa AAA Highest quality. Very small risk of default. Aa AA High quality. Small risk of default. A A High-Medium quality. Strong attributes, but potentially vulnerable. Baa BBB Medium quality. Currently adequate, but potentially unreliable. Ba BB Some speculative element. Long-run prospects questionable. B B Able to pay currently, but at risk of default in the future. Caa CCC Poor quality. Clear danger of default. Ca CC High speculative quality. May be in default. C C Lowest rated. Poor prospects of repayment. D - In default

7

8 15 The U.S. Bond Market: Source: U.S. Federal Reserve. Table L.4, Credit Market Debt, All Sectors, by Instrument, Amount ($bil.), August, 2015 Debt Instrument 2015 Q1 Treasury securities 13,062 Agency backed securities 7,901 Municipal securities 3,694 Corporate and foreign bonds 11,702 Mortgages 13,463 Consumer Credit 3,321 Corporate equities 36,834 Mutual fund shares 12,

9 Bond Valuation: Zero Coupon Bonds B = Market price of the Bond of bond F = Face value R = Annual percentage rate m = compounding period (annual m = 1, semiannual m = 2, ) i = Effective periodic interest rate; i=r/m T = Maturity (in years) N = Number of compounding periods; N = T*m Two cash flows to purchaser of bond:» -B at time 0» F at time T What is the price of a bond? Use present value formula: F B 1 i N 17 Valuing Zero Coupon Bonds: An Example Value a 5 year, U.S. Treasury strip with face value of $1,000. The APR is R=7.5% with annual compounding? What about quarterly compounding? What is the APR on a U.S. Treasury strip that pays $1,000 in exactly 7 years and is currently selling for $ under annual compounding? Semi-annual compounding?

10 Interest Rate Sensitivity: Zero Coupon Bonds Consider the following 1, 2 and 10-year zero-coupon bonds, all with» face value of F=$1,000» APR of R=10%, compounded annually. We obtain the following table for increases and decreases of the interest rate by 1%: Interest Rate Bond 1 Bond 2 Bond 3 1-Year 2-Year 10-Year 9.0% $ $ $ % $ $ $ % $ $ $ Bond prices move up if interest rates drop, decrease if interest rates rise 19 Bond Prices and Interest Rates $1,200 $1,000 $800 $600 $400 $200 1-Year 2-Year 10-Year $0 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Bond prices are inversely related to IR Longer term bonds are more sensitive to IR changes than short term bonds The lower the IR, the more sensitive the price

11 Measuring Interest Rate Sensitivity Zero Coupon Bonds We would like to measure the interest rate sensitivity of a bond or a portfolio of bonds.» How much do bond prices change if interest rates change by a small amount?» Why is this important? Use Dollar value of a one basis point decrease (DV01):» Basis point (bp): 1/100 of one percentage point =0.01%=0.0001» Calculate DV01: Method 1: Difference of moving one basis point down: DV01= B(R-0.01%)-B(R). Method 2: Difference of moving 1/2bp down minus 1/2pb up: DV01=B(R-0.005%) -B(R+0.005%). Method 3: Use calculus: B DV R 21 Computing DV01: An Example Reconsider the 1, 2 and 10- year bonds discussed before: Interest Rate Bond 1 Bond 2 Bond 3 1-Year 2-Year 10-Year 9.990% $ $ $ % $ $ $ % $ $ $ % $ $ $ Method 1 $ $ $ Method 2 $ $ $ Method 3 $ $ $ Method 3: B R $1, T T *$0.10 * T 1 T

12 DV01: A Graphical Approach 10-Year $1, $1, $ $ $ $ $0.00 Interest Rate DV01 estimates the change in the Price-Interest rate curve using a linear approximation. higher slope implies greater sensitivity 23 Valuing Coupon Bonds Example 1: Amortization Bonds Consider Amortization Bond» T=2» m=2» C=$2,000 c = C/m = $2,000/2 = $1,000» R=10% i = R/m = 10%/2 = 5% How can we value this security?» Brute force discounting» Similar to another security we already know how to value?» Replication

13 Valuing Coupon Bonds Example 1: Amortization Bonds Compare with a portfolio of zero coupon bonds: Buy Coupon Bond -$3, $1, $1, $1, $1, Buy 6-Month Zero -$ Buy 1-Year Zero -$ Buy 1.5-Year Zero -$ Buy 2-Year Zero -$ Portfolio -$3, A First Look at Arbitrage Reconsider amortization bond; suppose bond trades at $3,500 (as opposed to computed price of $3,545.95)» Can we make a profit without any risk? What is the strategy? What is the profit?

14 A First Look at Arbitrage Reconsider amortization bond; suppose bond trades at $3,500 (as opposed to computed price of $3,545.95)» Can make risk less profit Buy low: buy amortization bond Sell high: Sell portfolio of zero coupon bonds Time Period Buy Coupon Bond -$3, $1, $1, $1, $1, Sell 6-Month Zero $ $1, $0.00 $0.00 $0.00 Sell 1-Year Zero $ $0.00 -$1, $0.00 $0.00 Sell 1.5-Year Zero $ $0.00 $0.00 -$1, $0.00 Sell 2-Year Zero $ $0.00 $0.00 $0.00 -$1, Portfolio $3, $1, $1, $1, $1, Net Cash Flow $45.95 $0.00 $0.00 $0.00 $0.00 riskless profit of $45.95 no riskless profit if price is correct 27 Valuation of Coupon Bonds: Example 2: Straight Bonds What is the market price of a U.S. Treasury bond that has a coupon rate of 9%, a face value of $1,000 and matures exactly 10 years from today if the interest rate is 10% compounded semiannually? Months

15 Valuing Coupon Bonds The General Formula What is the market price of a bond that has an annual coupon C, face value F and matures exactly T years from today if the required rate of return is R, with m-periodic compounding?» Coupon payment is: c = C/m» Effective periodic interest rate is: i = R/m» number of periods N = Tm N c c c c c+f B Annuity Zero c i 1 1 F N 1 i 1 i N 29 The Concept of a Yield to Maturity So far we have valued bonds by using a given interest rate, then discounted all payments to the bond. Prices are usually given from trade prices» need to infer interest rate that has been used Definition: The yield to maturity is that interest rate that equates the present discounted value of all future payments to bondholders to the market price: Algebraic: B c yield 1 1 / m F 1 yield/ m N 1 yield/ m N

16 Yield to Maturity A Graphical Interpretation $2, $2, $1, $1, $ $0.00 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% Consider a U.S. Treasury bond that has a coupon rate of 10%, a face value of $1,000 and matures exactly 10 years from now.» Market price of $1,500, implies a yield of 3.91% (semi-annual compounding); for B=$1,000 we obviously find R=10%. 31 Interest Rate Sensitivity: Coupon Bonds Coupon bonds can be represented as portfolios of zerocoupon bonds» Implication for price sensitivity Consider purchasing the US Treasury bond discussed earlier (10 year, 9% coupon, $1,000 face)» Suppose immediately thereafter interest rates fall to 8%, compounded semiannually.» Suppose immediately thereafter interest rate rises to 12% compounded semiannually.» Suppose the interest rate equals 9%, compounded semiannually. What are the pricing implications of these scenarios?

17 Implication of Interest Rate Changes on Coupon Bond Prices Recall the general formula: c B 1 i N 1 i 1 i What is the price of the bond if the APR is 8% compounded semiannually? 1 F N Similarly: If R=12%: B=$ If R= 9%: B=$1, Relationship Between Coupon Bond Prices and Interest Rates Bond prices are inversely related to interest rates (or yields). A bond sells at par only if its interest rate equals the coupon rate A bond sells at a premium if its coupon rate is above the interest rate. A bond sells at a discount if its coupon rate is below the interest rate

18 Interest Rate Sensitivity of Coupon Bonds Consider two bonds with 10% annual coupons with maturities of 5 years and 10 years. The APR is 8% What are the responses to a.01% (1bp) interest rate change? Yield 5-Year Bond $ Change % Change 10-Year Bond $ Change % Change 7.995% $1, $ % $1, $ % 8.000% $1, $1, % $1, $ % $1, $ % DV01 $ $ Does the sensitivity of a coupon bond always increase with the term to maturity? 35 Bond Prices and Interest Rates Price (P) $2, $2, $1, $1, Year Bond 10-Year Bond $ $0.00 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% Interest Rate (R) Longer term bonds are more sensitive to changes in interest rates than shorter term bonds, in general

19 Bond Yields and Prices Consider the following two bonds:» Both have a maturity of 5 years» Both have yield of 8%» First has 6% coupon, other has 10% coupon, compounded annually. Then, what are the price sensitivities of these bonds, measured by DV01 as for zero coupon bonds? Yield 6%-Bond $ Change % change 10%-Bond $ Change % change 7.995% $ $ $1, $ % $ $1, % $ ($0.1891) $1, ($0.2101) % % DV01 $ $ Why do we get different answers for two bonds with the same yield and same maturity? 37 Maturity and Price Risk Zero coupon bonds have well-defined relationship between maturity and interest rate sensitivity: Coupon bonds can have different sensitivities for the same maturity» DV01 now depends on maturity and coupon Need concept of average maturity of coupon bond:» Duration

20 Duration Duration is a weighted average term to maturity where the weights are relative size of the contemporaneous cash flow. PV( c ) PV( c ) PV( c ) N PV( F) Duration T 1 T 2 T T 1 B 2 B N B N B Duration is a unitless number that quantifies the percentage change in a bond s price for a 1 percentage change in the interest rate. B B 1R Duration B R B R 1 R 39 Duration (cont.) The duration of a bond is less than its time to maturity (except for zero coupon bonds). The duration of the bond decreases the greater the coupon rate. This is because more weight (present value weight) is being given to the coupon payments. As market interest rate increases, the duration of the bond decreases. This is a direct result of discounting. Discounting at a higher rate means lower weight on payments in the far future. Hence, the weighting of the cash flows will be more heavily placed on the early cash flows -- decreasing the duration. Modified Duration = Duration / (1+yield)

21 Spot Rates A spot rate is a rate agreed upon today, for a loan that is to be made today» r 1 =5% indicates that the current rate for a one-year loan is 5%.» r 2 =6% indicates that the current rate for a two-year loan is 6%.» Etc. The term structure of interest rates is the series of spot rates r 1,r 2,r 3,» We can build using STRIPS or coupon bond yields.» Explanations of the term structure. 41 Term Structure, February 25 th,

22 Term Structure, August, Term Structure, May,

23 Term Structure of Interest Rates Source: National Economic Trends (St. Louis Fed) 45 History of Interest Rates July 1954 December 2014 Past performance is no guarantee of future results. Each bar shows the range of yield for each bond over the time period July 1954 to December This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index Morningstar. All Rights Reserved

24 Summary Bonds can be valued by discounting their future cash flows Bond prices change inversely with yield Price response of bond to interest rates depends on term to maturity.» Works well for zero-coupon bond, but not for coupon bonds Measure interest rate sensitivity using DV01 and duration. The term structure implies terms for future borrowing:» Forward rates» Compare with expected future spot rates

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

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

More information

Bonds and Yield to Maturity

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

More information

Interest Rates and Bond Valuation

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

More information

Chapter 3. Fixed Income Securities

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

More information

Chapter. Investing in Bonds. 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds. 2010 South-Western, Cengage Learning

Chapter. Investing in Bonds. 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds. 2010 South-Western, Cengage Learning Chapter 13 Investing in Bonds 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds 2010 South-Western, Cengage Learning Standards Standard 4.0 Investigate opportunities available for saving and investing.

More information

FNCE 301, Financial Management H Guy Williams, 2006

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

More information

Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation

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

More information

Chapter 3 Fixed Income Securities

Chapter 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 information

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

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

More information

Understanding Fixed Income

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

More information

Chapter 10. Fixed Income Markets. Fixed-Income Securities

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

More information

Global Financial Management

Global 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 information

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

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

More information

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

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

More information

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

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

More information

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities Bonds and preferred stock Investing in fixed income securities Basic definitions Stock: share of ownership Stockholders are the owners of the firm Two types of stock: preferred and common Preferred stock:

More information

FIN 472 Fixed-Income Securities Debt Instruments

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

More information

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

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

More information

INTERACTIVE BROKERS DISCLOSURE STATEMENT FOR BOND TRADING

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

More information

Chapter 11. Stocks and Bonds. How does this distribution work? An example. What form do the distributions to common shareholders take?

Chapter 11. Stocks and Bonds. How does this distribution work? An example. What form do the distributions to common shareholders take? Chapter 11. Stocks and Bonds Chapter Objectives To identify basic shareholder rights and the means by which corporations make distributions to shareholders To recognize the investment opportunities in

More information

Click Here to Buy the Tutorial

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

More information

Saving and Investing. Chapter 11 Section Main Menu

Saving and Investing. Chapter 11 Section Main Menu Saving and Investing How does investing contribute to the free enterprise system? How does the financial system bring together savers and borrowers? How do financial intermediaries link savers and borrowers?

More information

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

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

More information

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

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

More information

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

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

More information

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

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

More information

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests a guide to Bond Mutual Funds A bond mutual fund is an investment company that pools money from shareholders and invests primarily in a diversified portfolio of bonds. Table of Contents What Is a Bond?...

More information

Coupon Bonds and Zeroes

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

More information

Chapter 8 Interest Rates and Bond Valuation

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

More information

ANALYSIS OF FIXED INCOME SECURITIES

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

More information

BOND - Security that obligates the issuer to make specified payments to the bondholder.

BOND - Security that obligates the issuer to make specified payments to the bondholder. Bond Valuation BOND - Security that obligates the issuer to make specified payments to the bondholder. COUPON - The interest payments paid to the bondholder. FACE VALUE - Payment at the maturity of the

More information

High-yield bonds. Bonds that potentially reward investors for taking additional risk. High-yield bond basics

High-yield bonds. Bonds that potentially reward investors for taking additional risk. High-yield bond basics High-yield bonds Bonds that potentially reward investors for taking additional risk Types of high-yield bonds Types of high-yield bonds include: Cash-pay bonds. Known as plain vanilla bonds, these bonds

More information

Fin 3312 Sample Exam 1 Questions

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

More information

Lecture 2 Bond pricing. Hedging the interest rate risk

Lecture 2 Bond pricing. Hedging the interest rate risk Lecture 2 Bond pricing. Hedging the interest rate risk IMQF, Spring Semester 2011/2012 Module: Derivatives and Fixed Income Securities Course: Fixed Income Securities Lecturer: Miloš Bo ović Lecture outline

More information

Bonds and the Term Structure of Interest Rates: Pricing, Yields, and (No) Arbitrage

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)

More information

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

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

More information

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www.bc.edu/~irelandp/ec61.html Chapter 6: The Risk and Term Structure

More information

Chapter 5: Valuing Bonds

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

More information

Fixed Income: Practice Problems with Solutions

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

More information

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

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

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

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

More information

Important Information about Investing in Bonds

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

More information

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

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

More information

INTEREST RATE SWAPS September 1999

INTEREST 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 information

Interest Rates and Bond Valuation

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

More information

education booklet CORPS Introduction to corporate bonds STOCKCROSS FINANCIAL SERVICES

education booklet CORPS Introduction to corporate bonds STOCKCROSS FINANCIAL SERVICES education booklet CORPS Introduction to corporate bonds STOCKCROSS FINANCIAL SERVICES corporate bonds Definition Corporate Bonds represent debt certificates issued by a corporation to raise funds for various

More information

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

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

More information

US TREASURY SECURITIES - Issued by the U.S. Treasury Department and guaranteed by the full faith and credit of the United States Government.

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

More information

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

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

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

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

More information

ECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation

ECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation ECO 4368 Instructor: Saltuk Ozerturk Bonds and Their Valuation A bond is a long term contract under which a borrower (the issuer) agrees to make payments of interest and principal on speci c dates, to

More information

Chapter 4 Valuing Bonds

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

More information

Bond valuation and bond yields

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

More information

Answers to Review Questions

Answers 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 information

Topics to be Discussed Description of Fixed Income Securities Characteristics Used to Evaluate Securities. Fixed Income Securities

Topics to be Discussed Description of Fixed Income Securities Characteristics Used to Evaluate Securities. Fixed Income Securities Topics to be Discussed Description of Characteristics Used to Evaluate Securities Treasury Bonds Agency Bonds Municipal Bonds Corporate Bonds Institutional Bonds Evaluation of Bonds Preferred Stock Description

More information

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

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

More information

NCPERS Trustee Education Seminar

NCPERS Trustee Education Seminar NCPERS Trustee Education Seminar FIXED INCOME 101 May 2, 2015 Steve Eitel Senior Vice President Senior Institutional Client Advisor steven.eitel@pnc.com 312-384-8259 What is a bond or fixed income security

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

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

More information

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

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

More information

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM-09-05. April 28, 2014: Question and solutions 61 were added. January 14, 2014:

More information

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure: FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

More information

Equity-index-linked swaps

Equity-index-linked swaps Equity-index-linked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3-month LIBOR) and the

More information

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

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

More information

Practice Set #2 and Solutions.

Practice Set #2 and Solutions. FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

More information

Yield Measures, Spot Rates & Forward Rates

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

More information

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

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

More information

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

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

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Notes for Lecture 3 (February 14)

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

More information

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

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

More information

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

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

More information

http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial.

http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial. Bond Basics Tutorial http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx

More information

CHAPTER 5. Interest Rates. Chapter Synopsis

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

More information

Interest Rate and Currency Swaps

Interest Rate and Currency Swaps Interest Rate and Currency Swaps Eiteman et al., Chapter 14 Winter 2004 Bond Basics Consider the following: Zero-Coupon Zero-Coupon One-Year Implied Maturity Bond Yield Bond Price Forward Rate t r 0 (0,t)

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

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

More information

The Empirical Approach to Interest Rate and Credit Risk in a Fixed Income Portfolio

The Empirical Approach to Interest Rate and Credit Risk in a Fixed Income Portfolio www.empirical.net Seattle Portland Eugene Tacoma Anchorage March 27, 2013 The Empirical Approach to Interest Rate and Credit Risk in a Fixed Income Portfolio By Erik Lehr In recent weeks, market news about

More information

CHAPTER 10 BOND PRICES AND YIELDS

CHAPTER 10 BOND PRICES AND YIELDS CHAPTER 10 BOND PRICES AND YIELDS 1. a. Catastrophe bond. Typically issued by an insurance company. They are similar to an insurance policy in that the investor receives coupons and par value, but takes

More information

Duration and convexity

Duration 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 information

investor s guide BOND BASICS

investor s guide BOND BASICS investor s guide BOND BASICS CONTENTS What Are Bonds? 1 Why Invest in Bonds? 1 Key Bond Investment Considerations 2 How to Invest 13 Investment Strategy Considerations 17 For More Information 19 Glossary

More information

Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash.

Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash. Asset Classes Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash. Shares (also called Equities or Stocks) are shares bought in quoted

More information

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest

More information

O R S G U I D E S T I N T A HIGH YIELD BONDS. Investing for. Attractive Yields and. Diversification

O R S G U I D E S T I N T A HIGH YIELD BONDS. Investing for. Attractive Yields and. Diversification I N V E S T O R S G U I D E N T A O HIGH YIELD BONDS Investing for Attractive Yields and Diversification C O N T E N T S What Are High-Yield Bonds? 1 Investing in High-Yield Bonds 1 How Do Credit Ratings

More information

Financial Instruments. Chapter 2

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

More information

VALUATION 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 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 information

Using Securities Markets for Financing and Investing Opportunities

Using Securities Markets for Financing and Investing Opportunities Chapter 19 Using Securities Markets for Financing and Investing Opportunities McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Nineteen NAME that COMPANY

More information

A guide to investing in high-yield bonds

A guide to investing in high-yield bonds A guide to investing in high-yield bonds What you should know before you buy Are high-yield bonds suitable for you? High-yield bonds are designed for investors who: Can accept additional risks of investing

More information

Maturity and interest-rate risk

Maturity and interest-rate risk Interest rate risk, page 1 Maturity and interest-rate risk Suppose you buy one of these three bonds, originally selling at a yield to maturity of 8 percent. Yield to One-year 30-year 30-year maturity 8%

More information

20. Investments 4: Bond Basics

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

More information

A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%

A) 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 information

A guide to investing in high-yield bonds

A guide to investing in high-yield bonds A guide to investing in high-yield bonds What you should know before you buy Are high-yield bonds suitable for you? High-yield bonds are designed for investors who: Can accept additional risks of investing

More information

高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析. 全球财经证书培训领导品牌 Fixed Income (1) Embedded Options. Fixed Income (1) Example: Embedded Options

高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析. 全球财经证书培训领导品牌  Fixed Income (1) Embedded Options. Fixed Income (1) Example: Embedded Options 高顿网校 财经讲堂 2013 年 CFA 一级考试难点解析 高顿教育旗下品牌 : 高顿网校 Fixed Income (1) Embedded Options Option Type Benefits the Yield Price Call Issuer/Borrower Higher Lower Prepayment Issuer/Borrower Higher Lower Put Buyer

More information

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

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

More information

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

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

More information

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

More information

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Interest Theory

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Interest Theory SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Interest Theory This page indicates changes made to Study Note FM-09-05. January 14, 2014: Questions and solutions 58 60 were

More information

January 2008. Bonds. An introduction to bond basics

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

More information

CHAPTER 14: BOND PRICES AND YIELDS

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

More information

FIN 472 Fixed-Income Securities Forward Rates

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

More information

Investor Guide to Bonds

Investor Guide to Bonds Investor Guide Investor Guide to Bonds threadneedle.com Introduction Why invest in bonds? Although your capital is normally considered safe in a traditional deposit account, low interest rates have eroded

More information

Solutions to Practice Questions (Bonds)

Solutions 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 information