Index. 1. Financial Markets: Overview. 2. The Bond Market. 3. Risks Associated with Fixed Income Investments. 4. Bond Characteristics and Valuation
|
|
|
- Bryan Montgomery
- 7 years ago
- Views:
Transcription
1 Index 1. Financial Markets: Overview 2. The Bond Market 3. Risks Associated with Fixed Income Investments 4. Bond Characteristics and Valuation 5. Macro Environment
2 Chapter 24 Bond Characteristics and Valuation
3 Bond Characteristics The variations in the coupon, length of the loan period, interest rate and other features of the debt security change the price of the bond. Bonds are tradable long-term debt and therefore in this chapter we will illustrate the main characteristics in bond valuation and the risks associated with each.
4 Bond Valuation Bond Valuation is all about calculating the present value of the promised cash flows. There are three steps in the bond valuation process: 1. Estimate the cash flows over the life of the security. This includes, (1) coupon payments as well as the (2) return of the principle. 2. Determine the appropriate discount rate based on the risk of the receipt of the estimated cash flows. 3. Calculate the present value of the estimated cash flows by discounting it to a present value.
5 Bond Valuation present value of coupon payments Present Value of a Bond = + the present value of the par value of the bond In this calculation, you have 5 components: Present value of bond Principle amount (future/par value) Coupon (payments receivable) Discount Factor (interest rate/yield) Time to Maturity - PV - FV - PMT - r - n Given four of these components, one can calculate the fifth component. This is the basics of time value of money calculations, which are simply used to price bonds.
6 Bond Valuation For simplicity, consider a bond that will pay R 100 per year for 10 years and makes a single R1 000 payment at maturity. If the appropriate discount rate is 8% for all the cash flows, the value of the bond is: Coupon (PMT) Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Principal Payment + Coupon PP = PPP + PPP + PPP + (1+r) 1 (1+r) 2 (1+r) 3 PPP+PPPPPPPPP (1+r) n = (1+0.08) 1 (1+0.08) 2 (1+0.08) (1+0.08) 10 = R = present value of future cash flows
7 Sources of Return Debt securities that make explicit interest payments have three sources of return: 1. The periodic coupon payments made by the issuer. 2. The recovery of principle, along with any capital gain or loss that occurs when the bond matures, is called, or is sold. 3. Reinvestment income, or the income earned from reinvesting the periodic coupon payments (i.e. the compound interest on reinvested coupon payments) Reinvestment income is important because if the reinvestment rate is less than the yield to maturity (YTM), the realized yield on the bond will be less than the YTM. This is known as reinvestment risk.
8 Reinvestment Risk Other things being equal, a coupon bond s reinvestment risk will increase with: Higher coupons because there s more cash flow to reinvest. Longer maturities because more of the total value of the investment is in the coupon cash flows (and interest on coupon cash flows). In both cases, the amount of reinvested income will play a bigger role in determining the bond s total return and, therefore, introduce more reinvestment risk. A noncallable zero-coupon bond has no reinvestment risk over its life because there are no cash flows to reinvest prior to maturity.
9 Pricing Relationships As seen in the formula, the various inputs affect the price of the bond differently. Bond Values and Interest Rates: Bond Values and Bond Yields are INVERSELY related. An increase in the discount rate will decrease the present value of a bonds expected cash flows and visa versa.
10 Pricing Relationships Bond Values and the Passage of Time: Prior to maturity, a bond can be selling at a significant discount or premium to par value. However, regardless of its required yield, the price will converge to par value as maturity approaches (pull to par effect).
11 Pricing Relationships Coupon, Yield and Price: If the coupon percentage is equal to the yield then the bond will be priced at par If the coupon percentage less then yield, the bond will trade at a discount If the coupon percentage is greater than yield, bond will trade at premium
12 Pricing Relationships Duration: Duration or Modified Duration is the rate of change of price with respect to yield or a linear measure of how the price of a bond changes in response to interest rate changes. As interest rates change, the price does not change linearly, but rather is a convex function of interest rates. This convex function is due to the nature of the price yield relationship as illustrated below:
13 Duration of a Nominal Bond Coupon (PMT) Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Principal Payment + Coupon D
14 Bonds Included in ALBI Bond Code Maturity Coupon MTM All in price Modified Duration Running Yield R Dec % R Sep % R Sep % ES18 20-Apr % R Dec % R Jan % DV22 07-Feb % TN20 17-Sep % R Mar % ES23 25-Jan % DV23 27-Feb % R Feb % TN23 06-Nov % ES26 02-Apr % R Dec % R Feb % ES33 15-Sep % R Mar % R Feb % R Feb %
15 Income from a Government Bond Example : R157 bond has a coupon rate of 13.5% and matures in 3 equal tranches in 2014/2015/2016 So on a nominal amount of R100 : Pays income of 13.5%/2 = R6.75 every 6 months Pays R100 (made up of R33.3 x 3) at maturity Current Price at yield of 5.21% : R Thus Running Yield = 13.5 / = 11.41% Running yield is the ratio of the annual coupon payment and the bond's current all in price *MTM in the previous table is yield to maturity
16 Income from a Government Bond Pull to Par effect example of the R157 Current Price at yield of 5.207% : R As bond approaches maturity, price will approach R100. This means that for the R157, over the next 2.38 years, it will lose value (on average) at the rate of : ( ) / 2.38 = 7.67% per year. On initial price of R this represents : 7.67 / = 6.48 % CAPITAL LOSS per year.
17 Inflation Linked Bonds Bonds linked to the inflation rate Cut out inflation risk of an investment or as a hedge against inflation Pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate (not a fixed coupon rate) A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.
18 Inflation Linked Bonds Coupon Coupon Coupo n Coupo n Coupon Coupon Coupon Coupon Coupon Principal Repayment The ILB s coupon payments AND the Principal amount grow with inflation.
19 Inflation Linked Bonds Bond Code Maturity Coupon MTM All in price Modified Duration R Jan R Jan R Jan R Dec I Jan R Mar R Dec I Jan I Dec
20 Duration Calculation of Nominal vs. ILB The R186 (Nominal Bond) and I2050 (Inflation Linked bond) has yields of 6.8% and 1.96% respectively. While their durations are 7.9 and As such we can calculate how sensitive they are to interest rate moves. Let us assume a 20 bp up move for the R186 and the I2050 to 7% and 2.16%. Price change = (-) x (Move) x Duration R186 = (-) * (0.2%) * 7.9 = -1.58% I2050 = (-) * (0.2%) * 25.1 = -5.02%
21 Duration of ILB s Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Principal Repayment D
22 Pricing Relationships Convexity: Convexity is a measure of the curvature of how the price of a bond changes as the interest rate/yield changes. Specifically, duration can be formulated as the first derivative of the price function of the bond with respect to the interest rate in question, and the convexity as the second derivative. Convexity helps to approximate the change in price that is not explained by duration.
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
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
CHAPTER 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
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.
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
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
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
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
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
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
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
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
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
Tax rules for bond investors
Tax rules for bond investors Understand the treatment of different bonds Paying taxes is an inevitable part of investing for most bondholders, and understanding the tax rules, and procedures can be difficult
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
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
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 14: BOND PRICES AND YIELDS
CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:
Bond Market Overview and Bond Pricing
Bond Market Overview and Bond Pricing. Overview of Bond Market 2. Basics of Bond Pricing 3. Complications 4. Pricing Floater and Inverse Floater 5. Pricing Quotes and Accrued Interest What is A Bond? Bond:
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
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
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
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
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;
Practice 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
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
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
Investments Analysis
Investments Analysis Last 2 Lectures: Fixed Income Securities Bond Prices and Yields Term Structure of Interest Rates This Lecture (#7): Fixed Income Securities Term Structure of Interest Rates Interest
Bond 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
Finance 350: Problem Set 6 Alternative Solutions
Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas
Bonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University
Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University
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
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
How 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
Chapter 6 Interest Rates and Bond Valuation
Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest
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
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
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
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
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
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
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
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.
Asset Valuation Debt Investments: Analysis and Valuation
Asset Valuation Debt Investments: Analysis and Valuation Joel M. Shulman, Ph.D, CFA Study Session # 15 Level I CFA CANDIDATE READINGS: Fixed Income Analysis for the Chartered Financial Analyst Program:
Chapter 4: Time Value of Money
FIN 301 Homework Solution Ch4 Chapter 4: Time Value of Money 1. a. 10,000/(1.10) 10 = 3,855.43 b. 10,000/(1.10) 20 = 1,486.44 c. 10,000/(1.05) 10 = 6,139.13 d. 10,000/(1.05) 20 = 3,768.89 2. a. $100 (1.10)
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
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
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
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...
VALUATION OF FIXED INCOME SECURITIES. Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting
VALUATION OF FIXED INCOME SECURITIES Presented By Sade Odunaiya Partner, Risk Management Alliance Consulting OUTLINE Introduction Valuation Principles Day Count Conventions Duration Covexity Exercises
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
1. What are the three types of business organizations? Define them
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
FINANCIAL 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
Understanding 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
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
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
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
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
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
Math Workshop Algebra (Time Value of Money; TVM)
Math Workshop Algebra (Time Value of Money; TVM) FV 1 = PV+INT 1 = PV+PV*I = PV(1+I) = $100(1+10%) = $110.00 FV 2 = FV 1 (1+I) = PV(1+I)(1+I) = PV(1+I) 2 =$100(1.10) 2 = $121.00 FV 3 = FV 2 (1+I) = PV(1
Bond Return Calculation Methodology
Bond Return Calculation Methodology Morningstar Methodology Paper June 30, 2013 2013 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction
TVM Applications Chapter
Chapter 6 Time of Money UPS, Walgreens, Costco, American Air, Dreamworks Intel (note 10 page 28) TVM Applications Accounting issue Chapter Notes receivable (long-term receivables) 7 Long-term assets 10
How to calculate present values
How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance
American 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
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
How To Calculate The Cost Of Capital Of A Firm
Sample Problems Chapter 10 Title: Cost of Debt 1. Costly Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28 years, and an annual coupon rate of 16.0%. Flotation costs associated
CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis
CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt
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
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.
Use of fixed income products within a company's portfolio
Theoretical and Applied Economics Volume XIX (2012), No. 10(575), pp. 5-14 Use of fixed income products within a company's portfolio Vasile DEDU The Bucharest University of Economic Studies vdedu03@yahoo.com
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
issue 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.
Assuming office supplies are charged to the Office Supplies inventory account when purchased:
Adjusting Entries Prepaid Expenses Second Bullet Example - Assuming office supplies are charged to the Office Supplies inventory account when purchased: Office supplies expense 7,800 Office supplies 7,800
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
Financial 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
DEBT MARKET. Mark to Market Valuation Rules. Page 1 of 19
DEBT MARKET Mark to Market Valuation Rules 2014 JSE Limited Reg No: 2005/022939/06 Member of the World Federation of Exchanges JSE Limited I 2014 Page 1 of 19 Table of Contents 1. Executive Summary...
CHAPTER 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
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
Module 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
Manual 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
Chapter 8. Reporting and Analyzing Receivables
Chapter 8 Reporting and Analyzing Receivables Study Objective 1 - Identify the Different Types of Receivables The term receivables refers to amounts due from individuals and companies. Receivables are
Mathematics. Rosella Castellano. Rome, University of Tor Vergata
and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings
LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs.
LO.a: Interpret interest rates as required rates of return, discount rates, or opportunity costs. 1. The minimum rate of return that an investor must receive in order to invest in a project is most likely
GESTÃO FINANCEIRA II PROBLEM SET 2 - SOLUTIONS
GESTÃO FINANCEIRA II PROBLEM SET - SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 010-011 Yield to Maturity Chapter 8 Valuing Bonds 8-3. The following
Distinguishing 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
Intermediate Accounting II (ACCT 342/542) Winter, 2014 Exam 2 Solutions
Intermediate Accounting II (ACCT 342/542) Winter, 2014 Exam 2 Solutions Question 1 (1) The proceeds from issuing $5,000,000 of bonds on January 1, 2014, with annual cash interest payments (first payment
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
CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
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,
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
Derivatives Interest Rate Futures. Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles
Derivatives Interest Rate Futures Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Interest Rate Derivatives Forward rate agreement (FRA): OTC contract
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
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
Chapter Two. Determinants of Interest Rates. McGraw-Hill /Irwin. Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Two Determinants of Interest Rates Interest Rate Fundamentals Nominal interest rates - the interest rate actually observed in financial markets directly affect the value (price) of most securities
Analysis One Code Desc. Transaction Amount. Fiscal Period
Analysis One Code Desc Transaction Amount Fiscal Period 57.63 Oct-12 12.13 Oct-12-38.90 Oct-12-773.00 Oct-12-800.00 Oct-12-187.00 Oct-12-82.00 Oct-12-82.00 Oct-12-110.00 Oct-12-1115.25 Oct-12-71.00 Oct-12-41.00
Trading the Yield Curve. Copyright 1999-2006 Investment Analytics
Trading the Yield Curve Copyright 1999-2006 Investment Analytics 1 Trading the Yield Curve Repos Riding the Curve Yield Spread Trades Coupon Rolls Yield Curve Steepeners & Flatteners Butterfly Trading
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
How To Value Bonds
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
Accounting for Bonds and Long-Term Notes
Accounting for Bonds and Long-Term Notes Bond Premiums and Discounts Effective interest method Bond issuance Interest expense Types of Debt Instruments Zero-Coupon Bonds Convertible Bonds Detachable Warrants
MBA Finance Part-Time Present Value
MBA Finance Part-Time Present Value Professor Hugues Pirotte Spéder Solvay Business School Université Libre de Bruxelles Fall 2002 1 1 Present Value Objectives for this session : 1. Introduce present value