Valuing Bonds. Professor: Burcu Esmer
|
|
- Benjamin Johns
- 6 years ago
- Views:
Transcription
1 Valuing Bonds Professor: Burcu Esmer
2 Valuing Bonds A bond is a debt instrument issued by governments or corporations to raise money The successful investor must be able to: Understand bond structure Calculate bond rates of return Understand interest rate risk Differentiate between real and nominal returns 2
3 Bond Basics Bond: long-term debt security usually issued by a corporation or government body Notes Notes are issued in two-, three-, five- and 10-year terms Bonds Bonds are long-term investments with terms of more than 10 years Mortgage Bonds These bonds are typically backed by real estate holdings and/or real property such as equipment. Collateral Trust Bonds A bond that is secured by a financial asset - such as stock or other bonds - that is deposited and held by a trustee for the holders of the bond. Debentures A type of debt instrument that is not secured by physical asset or collateral. 3
4 Bond Basics (cont.) Bond indenture: contract between issuer and investor that specifies terms of agreement face (par) value: principal to be repaid at end of loan coupon rate: (CR) the amount of the coupon payment (C) as a % of the face value of the bond coupons: (coupon payment) periodic interest payments made over the life of the bond maturity date: when bond s face value is paid frequency of payments: usually semiannually for U.S. corporate bonds bond_certificate.jpg 4
5 Straight Bonds An annual bond pays the holder a coupon payment, C, each year and returns the face or par value, FV, at maturity. C=(Coupon rate)x(face Value) Coupon rate is a stated rate written onto the bond. It does not change! C C C C+FV N r Decompose into a $C, N-period annuity + a lump sum of $FV received in N- periods. 4
6 Pricing Bonds value of any financial asset: depends on amount, timing, and riskiness of cash flows => use Discounted Cash Flow (DCF) valuation: Find PV of cash flows! 6
7 Bond Pricing: Example What is the price of a 9% annual coupon bond with a par value of $1,000 that matures in 3 years? Assume a required rate of return of 4%. 7
8 Bond Pricing A bond is a package of two investments: an annuity and a final repayment. Bond price= coupon payment r x 1 1 (1+r) n par value + (1+r) n PV PV PV Bond Coupons ParValue PV coupon( Annuity Factor) par value( Discount Factor) Bond 1 (1 r) where Annuity Factor r 1 and Discount Factor t (1 r) t 8
9 Bond Pricing: Example What is the value of a 3-year annuity that pays $90 each year and an additional $1,000 at the date of the final repayment? Assume a discount rate of 4%. PV Bond 3 1 (1.04) 1 $90 $1, (1.04) $1,
10 Semiannual Coupons Most bonds in the U.S. pay interest twice a year (1/2 of the annual coupon). coupon rates and yield (YTM)s quoted on annual basis Adjustment needed: divide coupon payment and yield (YTM) by 2 multiply n by 2. 10
11 Example PK Inc. issues 10% bonds with 20 years to maturity. Similar bonds have a YTM of 11%. What is the price of the PK Inc. bond if coupons payments occur annually? What is the price of the PK Inc. bond if coupons payments occur semi-annually Annual coupon pmt: $100, N=20. FV=1000, YTM=11% PV of annual coupon payments: Annual pmt:. FV=1000, N=20, YTM=11% PV of face value : Total price= = Semi-Annual coupon pmt: $50, N=40. FV=1000, YTM=5.5% PV of semi-coupon payments: PV of face value : Total price=
12 Sample Treasury bond quotes for May 14, 2010 Bid-ask spread 12
13 Bond Yields To calculate how much we earn on a bond investment, we can calculate two types of bond yields: Current Yield Annual coupon payments divided by bond price. Yield to Maturity Interest rate for which the present value of the bond s payments equals the price 13
14 Current Yield: Example Suppose you spend $1,150 for a $1,000 face value bond that pays a $60 annual coupon payment for 3 years. What is the bond s current yield? Your income as a proportion of the initial outlay. 14 How about capital gain return? What will happen to the price of the bond after 3 years?
15 Yield to Maturity Yield to Maturity: PV coupon 1 (1 r) coupon... 2 (1 r) ( coupon (1 r) t par) 15
16 Yield to Maturity: Example Suppose you spend $1,150 for a $1,000 face value bond that pays a $60 annual coupon payment for 3 years. What is the bond s yield to maturity? $1,150 $60 (1 r) 1 $60 (1 r) 2 ($60 $1,000) 3 (1 r) 16
17 Pricing Bonds To price a bond: discount the coupon payments and face value at appropriate market rate Yield to Maturity (YTM): the required market interest rate that makes the discounted cash flows of the bond equal to the bond s price 17
18 WARNING The coupon rate is NOT the discount rate used in the Present Value calculations. The coupon rate merely tells us what cash flow the bond will produce. Since the coupon rate is listed as a %, this misconception is quite common. 18
19 Pricing Bonds In general, Bond Value= PV of coupons + PV of par = PVA(r,n,pmt=coupon) + PV(r,n,FV=par) r = YTM per coupon period for this type of bond n = # of coupon periods until maturity Bond price= coupon payment r x 1 1 (1+r) n par value + (1+r) n 19
20 Treasury Yields The interest rate on 10-year U.S. Treasury bonds 20
21 Bond Prices & Interest Rates As interest rates change, so do bond prices. What is the present value of a 4% coupon bond with face value $1,000 that matures in 3 years? Assume a discount rate of 5%. What is the present value of this same bond at a discount rate of 2%? 21
22 Bond Pricing Example What is the price of a 5.0 % annual coupon bond, with a $1,000 face value, which matures in 3 years? Assume a required return of 2.15%. PV 50 (1.0215) 1 50 (1.0215) 2 1,050 (1.0215) 3 PV $1,
23 Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 5 %? PV 50 (1.050) 1 50 (1.050) 2 1,050 (1.050) 3 PV $1,000 23
24 Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 8 %? PV 50 (1.08) 1 50 (1.08) 2 1,050 (1.08) 3 PV $
25 Dynamic Behavior of Bond Prices Discount A bond is selling at a discount if the price is less than the face value. Par A bond is selling at par if the price is equal to the face value. Premium A bond is selling at a premium if the price is greater than the face value. 25
26 Discounts and Premiums If a coupon bond trades at a discount, an investor will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. If a bond trades at a discount, its yield to maturity will exceed its coupon rate. What is the relationship between current yield and the return on bonds in this case? If a coupon bond trades at a premium it will earn a return from receiving the coupons but this return will be diminished by receiving a face value less than the price paid for the bond. Most coupon bonds have a coupon rate so that the bonds will initially trade at, or very close to, par. 26
27 Discounts and Premiums (cont'd) Bond Prices Immediately After a Coupon Payment 27
28 Example 28
29 Example (cont'd) 29
30 Interest Rate Risk Definition: changes in bond prices arising from fluctuating market interest rates 1,200 1,100 Bond price ($) 1, Interest rate (%) Note: The value of the 5% bond falls as interest rates rise 30
31 Fixed vs. variable components of a bond: WARNING!!! fixed: coupon, face value, maturity date variable: time to maturity, YTM 31
32 Interest rate sensitivity Bond A: 8% Coupon, FV=$1,000, and matures in 5 years Bond B: 8% Coupon, FV=$1,000, and matures in 10 years Which bond is more sensitive to interest rates? Why? 32
33 Interest Rate Risk 3,000 2,500 $ Bond Price 2,000 1, yr bond When the interest rate equals the 5.0% coupon rate, both bonds sell at face value 1,000 3 yr bond YTM 33
34 Interest rate sensitivity (Cont d) Bond A: 0% Coupon, FV=$1,000, and matures in 10 years Bond B: 8% Coupon, FV=$1,000, and matures in 10 years Which bond is more sensitive to interest rates? Why? 34
35 Yield to Maturity - YTM What rate of return would you earn if pay $ for a $1000 face value bond that pays an 8% coupon and that has 10 years to maturity? P 0 = , r=ytm=? SOLVE: = 80(PVIFA YTM=?,10 ) (PVIF YTM=?,10 ) ITERATE (1st try 10%, then 9%!) ( or use your financial calculator N=10, PMT=80, FV=1,000, PV= , I=?=YTM=9% ) 35
36 What happens to the price of the bond if interest rates change causing your required return to increase to 12%? To decrease to 4%? P 0 = 80(PVIFA 12%,10 ) (PVIF 12%,10 ) =$ Bond sells at a discount P 0 = 80(PVIFA 4%,10 ) (PVIF 4%,10 ) =$1, Bond sells at a premium If you buy this bond today and hold it to maturity your return will be the yield to maturity! 36
37 Bond Rate of Return Rate of Return - Earnings per period per dollar invested. Rate of return = Rate of return = total income investment Coupon income + price change investment 37 Do not confuse the bond s rate of return over a particular investment period with its YTM!
38 Rate of Return 38
39 Rate of Return: Example Suppose you purchase a 5% coupon bond, par value $1,000, with 5 years until maturity, for $ today. After one year you sell the bond for $ What was the rate of return during the period? What is the YTM when you bought the bond? Lower or higher than 4.10%? What happened to YTM after 1 year when you sold the bond? 39
40 Bond Price Interest Rate Risk 30-year maturity, 6% coupon PREMIUM bond with fixed 4% YTM and 30-year maturity, 2% coupon DISCOUNT bond with fixed 4% YTM 1,400 1,300 Price path for Premium Bond 1,200 1,100 1, Today Price path for Discount Bond Time to Maturity Maturity 40
41 Time and Bond Prices Holding all other things constant, the price of discount or premium bond will move towards par value over time. If a bond s yield to maturity has not changed, then the rate of return of an investment in the bond equals its yield to maturity even if you sell the bond early. 41
42 Example One bond has a coupon rate of 8%, another a coupon rate of 12%. Both bonds have 10-year maturities and sell at a yield to maturity of 10%. If their yields to maturity next year are still 10%, what is the rate of return on each bond? Does the higher coupon bond give a higher rate of return? 42
43 Answer Bond 1 Year 0: 1 1,1$ 000 $ 80 $ (10 ) PV 10 Year 1: Rate of return = 1 1,1$ 000 PV $ 80 $ (10 ) $ 80 ($ $ 877.) %0.10 $ Bond 2 Year 0: Year 1: 1 1,1$ 000 $ 120,1$ (10 ) PV ,1$ 000 PV $ 120,1$ (10 ) Rate of return = $120 ($ $ ) $ %
44 The Yield Curve Term Structure of Interest Rates - A listing of bond maturity dates and the interest rates that correspond with each date. Yield Curve - Graph of the term structure. 44
45 The Yield Curve Treasury strips are bonds that make a single payment. The yields on Treasury strips in February 2008 show that investors received a higher yield on longer term bonds. Why do some people prefer short-term bonds then? 45
46 Nominal and Real Rates of Interest TIPS (treasury inflation protected securities) The real cash flows are fixed but the nominal cash flows (interest and principle) are increased as the CPI increases. E.g. In 2008, 10- year TIPS offered a yield of 1.5% (Real interest rate). The yield on nominal 10-year Treasury bonds was 3.8%. 46
47 Example The US treasury issues 3% coupon, 2-year TIPS. Assume 5% inflation in the first year and further 4% in the second year. Year 1 Year 2 Real Cash flows Year 1 Year 2 Nominal Cash flows 30*1.05= *1.05*1.04=1,
48 Real vs. Nominal Yields Red line Real yield on long-term UK indexed bonds Blue line Nominal yield on long-term UK bonds 48
49 Corporate Bonds and Default Risk (a.k.a. Credit Risk) Default premium The difference between the promised yield on a corporate bond and the yield on a U.S. Treasury Bond with the same coupon and maturity. Investment grade vs. Junk bonds Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. The yield of bonds with credit risk will be higher than that of otherwise identical default-free bonds. 49
50 Bond Ratings Standard Moody' s & Poor's Safety Investment grade Junk bonds Aaa AAA The strongest rating; ability to repay interest and principal is very strong. Aa AA Very strong likelihood that interest and principal will be repaid A A Strong ability to repay, but some vulnerability to changes in circumstances Baa BBB Adequate capacity to repay; more vulnerability to changes in economic circumstances Ba BB Considerable uncertainty about ability to repay. B B Likelihood of interest and principal payments over sustained periods is questionable. Caa CCC Bonds in the Caa/CCC and Ca/CC classes may already be Ca CC in default or in danger of imminent default C C C-rated bonds offer little prospect for interest or principal on the debt ever to be repaid. 50
51 Corporate Yield Curves for Various Ratings, February 2009 Source: Reuters 51
52 Yield Spreads and the Financial Crisis Source: Bloomberg.com 52
53 Corporate Bonds Zero coupons no periodic interest payments issued at a substantial discount from par Floating rate bonds Coupon rate change over time E.g. Treasury rate plus 2% Convertible bonds Can be exchanged for a specified number of common stock shares. 53
54 Zero-Coupon Bonds Zero-Coupon Bond Does not make coupon payments Always sells at a discount (a price lower than face value), so they are also called pure discount bonds Treasury Bills are U.S. government zero-coupon bonds with a maturity of up to one year. 54
55 Zero-Coupon Bonds (cont'd) Suppose that a one-year, risk-free, zero-coupon bond with a $100,000 face value has an initial price of $96, The cash flows would be: Although the bond pays no interest, your compensation is the difference between the initial price and the face value. 55
56 Zero-Coupon Bonds (cont'd) Yield to Maturity The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond. Price of a Zero-Coupon bond P FV (1 YTM ) n n 56
57 Zero-Coupon Bonds (cont'd) Yield to Maturity For the one-year zero coupon bond: 96, ,000 (1 YTM ) 1 100,000 1 YTM , Thus, the YTM is 3.5%. 57
58 Zero-Coupon Bonds (cont'd) Yield to Maturity Yield to Maturity of an n-year Zero-Coupon Bond YTM n FV P 1 n 1 58
Chapter 5. Valuing Bonds
Chapter 5 Valuing Bonds 5-2 Topics Covered Bond Characteristics Reading the financial pages after introducing the terminologies of bonds in the next slide (p.119 Figure 5-2) Bond Prices and Yields Bond
More informationChapter 4. Characteristics of Bonds. Chapter 4 Topic Overview. Bond Characteristics
Chapter 4 Topic Overview Chapter 4 Valuing Bond Characteristics Annual and Semi-Annual Bond Valuation Reading Bond Quotes Finding Returns on Bond Risk and Other Important Bond Valuation Relationships Bond
More informationI. Asset Valuation. The value of any asset, whether it is real or financial, is the sum of all expected future earnings produced by the asset.
1 I. Asset Valuation The value of any asset, whether it is real or financial, is the sum of all expected future earnings produced by the asset. 2 1 II. Bond Features and Prices Definitions Bond: a certificate
More informationCHAPTER 8. Valuing Bonds. Chapter Synopsis
CHAPTER 8 Valuing Bonds Chapter Synopsis 8.1 Bond Cash Flows, Prices, and Yields A bond is a security sold at face value (FV), usually $1,000, to investors by governments and corporations. Bonds generally
More informationCHAPTER 5 Bonds and Their Valuation
5-1 5-2 CHAPTER 5 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk Key Features of a Bond 1 Par value: Face amount; paid at maturity Assume $1,000 2 Coupon
More informationBond Valuation. FINANCE 100 Corporate Finance
Bond Valuation FINANCE 100 Corporate Finance Prof. Michael R. Roberts 1 Bond Valuation An Overview Introduction to bonds and bond markets» What are they? Some examples Zero coupon bonds» Valuation» Interest
More informationBonds and Their Valuation
Chapter 7 Bonds and Their Valuation Key Features of Bonds Bond Valuation Measuring Yield Assessing Risk 7 1 What is a bond? A long term debt instrument in which a borrower agrees to make payments of principal
More informationI. Introduction to Bonds
University of California, Merced ECO 163-Economics of Investments Chapter 10 Lecture otes I. Introduction to Bonds Professor Jason Lee A. Definitions Definition: A bond obligates the issuer to make specified
More informationKEY CONCEPTS AND SKILLS
Chapter 5 INTEREST RATES AND BOND VALUATION 5-1 KEY CONCEPTS AND SKILLS Know the important bond features and bond types Comprehend bond values (prices) and why they fluctuate Compute bond values and fluctuations
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 informationCHAPTER 4 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk
4-1 CHAPTER 4 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk 4-2 Key Features of a Bond 1. Par value: Face amount; paid at maturity. Assume $1,000. 2. Coupon
More informationChapter 5. Bonds, Bond Valuation, and Interest Rates
Chapter 5 Bonds, Bond Valuation, and Interest Rates 1 Chapter 5 applies Time Value of Money techniques to the valuation of bonds, defines some new terms, and discusses how interest rates are determined.
More informationChapter 5. Interest Rates and Bond Valuation. types. they fluctuate. relationship to bond terms and value. interest rates
Chapter 5 Interest Rates and Bond Valuation } Know the important bond features and bond types } Compute bond values and comprehend why they fluctuate } Appreciate bond ratings, their meaning, and relationship
More informationReading. Valuation of Securities: Bonds
Valuation of Securities: Bonds Econ 422: Investment, Capital & Finance University of Washington Last updated: April 11, 2010 Reading BMA, Chapter 3 http://finance.yahoo.com/bonds http://cxa.marketwatch.com/finra/marketd
More informationACF719 Financial Management
ACF719 Financial Management Bonds and bond management Reading: BEF chapter 5 Topics Key features of bonds Bond valuation and yield Assessing risk 2 1 Key features of bonds Bonds are relevant to the financing
More informationEconomics 173A and Management 183 Financial Markets
Economics 173A and Management 183 Financial Markets Fixed Income Securities: Bonds Bonds Debt Security corporate or government borrowing Also called a Fixed Income Security Covenants or Indenture define
More informationFixed income security. Face or par value Coupon rate. Indenture. The issuer makes specified payments to the bond. bondholder
Bond Prices and Yields Bond Characteristics Fixed income security An arragement between borrower and purchaser The issuer makes specified payments to the bond holder on specified dates Face or par value
More informationA Guide to Investing In Corporate Bonds
A Guide to Investing In Corporate Bonds Access the corporate debt income portfolio TABLE OF CONTENTS What are Corporate Bonds?... 4 Corporate Bond Issuers... 4 Investment Benefits... 5 Credit Quality and
More informationFixed Income Securities: Bonds
Economics 173A and Management 183 Financial Markets Fixed Income Securities: Bonds Updated 4/24/17 Bonds Debt Security corporate or government borrowing Also called a Fixed Income Security Covenants or
More informationBond Prices and Yields
Bond Characteristics 14-2 Bond Prices and Yields Bonds are debt. Issuers are borrowers and holders are creditors. The indenture is the contract between the issuer and the bondholder. The indenture gives
More informationCHAPTER 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 informationCHAPTER 14. Bond Characteristics. Bonds are debt. Issuers are borrowers and holders are creditors.
Bond Characteristics 14-2 CHAPTER 14 Bond Prices and Yields Bonds are debt. Issuers are borrowers and holders are creditors. The indenture is the contract between the issuer and the bondholder. The indenture
More information1) Which one of the following is NOT a typical negative bond covenant?
Questions in Chapter 7 concept.qz 1) Which one of the following is NOT a typical negative bond covenant? [A] The firm must limit dividend payments. [B] The firm cannot merge with another firm. [C] The
More informationQuestions 1. What is a bond? What determines the price of this financial asset?
BOND VALUATION Bonds are debt instruments issued by corporations, as well as state, local, and foreign governments to raise funds for growth and financing of public projects. Since bonds are long-term
More informationCHAPTER 14. Bond Prices and Yields INVESTMENTS BODIE, KANE, MARCUS. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 14 Bond Prices and Yields INVESTMENTS BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. INVESTMENTS BODIE, KANE, MARCUS 14-2 Bond Characteristics
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 informationCopyright 2004 Pearson Education, Inc. All rights reserved. Bonds
Copyright 2004 Pearson Education, Inc. All rights reserved. Bonds What is a Bond? Debt securities that may pay a rate of interest based upon the face amount or par value of the bond Bond investors receive
More informationChapter Seven 9/25/2018. Chapter 6 The Risk Structure and Term Structure of Interest Rates. Bonds Are Risky!!!
Chapter Seven Chapter 6 The Risk Structure and Term Structure of Interest Rates Bonds Are Risky!!! Bonds are a promise to pay a certain amount in the future. How can that be risky? 1. Default risk - the
More informationMBF1223 Financial Management Prepared by Dr Khairul Anuar
MBF1223 Financial Management Prepared by Dr Khairul Anuar L4 Bonds & Bonds Valuation www.notes638.wordpress.com Bonds - Introduction A bond is a debt instrument issued by a borrower which has borrowed
More informationCHAPTER 14. Bond Prices and Yields INVESTMENTS BODIE, KANE, MARCUS. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 14 Bond Prices and Yields McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 14-2 Bond Characteristics Bonds are debt. Issuers are borrowers and holders are
More informationMBF1223 Financial Management Prepared by Dr Khairul Anuar
MBF1223 Financial Management Prepared by Dr Khairul Anuar L4 Bonds & Bonds Valuation www.mba638.wordpress.com Bonds - Introduction A bond is a debt instrument issued by a borrower which has borrowed a
More informationA CLEAR UNDERSTANDING OF THE INDUSTRY
A CLEAR UNDERSTANDING OF THE INDUSTRY IS CFA INSTITUTE INVESTMENT FOUNDATIONS RIGHT FOR YOU? Investment Foundations is a certificate program designed to give you a clear understanding of the investment
More informationLearn about bond investing. Investor education
Learn about bond investing Investor education The dual roles bonds can play in your portfolio Bonds can play an important role in a welldiversified investment portfolio, helping to offset the volatility
More informationChapter 3: Debt financing. Albert Banal-Estanol
Corporate Finance Chapter 3: Debt financing Albert Banal-Estanol Debt issuing as part of a leverage buyout (LBO) What is an LBO? How to decide among these options? In this chapter we should talk about
More informationChapter Six. Bond Markets. McGraw-Hill /Irwin. Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Six Bond Markets Overview of the Bond Markets A bond is is a promise to make periodic coupon payments and to repay principal at maturity; breech of this promise is is an event of default carry
More informationFin 5633: Investment Theory and Problems: Chapter#15 Solutions
Fin 5633: Investment Theory and Problems: Chapter#15 Solutions 1. Expectations hypothesis: The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping
More informationGiven the following information, what is the WACC for the following firm?
Chapter 1 Cost of Capital The required return for an asset is a function of the risk of the asset and the return to the investor is the same as the cost to the company. The firms cost of capital provides
More informationFIN 684 Fixed-Income Analysis Corporate Debt Securities
FIN 684 Fixed-Income Analysis Corporate Debt Securities Professor Robert B.H. Hauswald Kogod School of Business, AU Corporate Debt Securities Financial obligations of a corporation that have priority over
More information7. Bonds and Interest rates
1 7. Bonds and Interest rates Fixed income may seem boring, but it s not. It s a huge and very dynamic market. Much larger than equities. Bond traders can take on similar levels of risk and earn similar
More informationFUNDAMENTALS OF THE BOND MARKET
FUNDAMENTALS OF THE BOND MARKET Bonds are an important component of any balanced portfolio. To most they represent a conservative investment vehicle. However, investors purchase bonds for a variety of
More informationRISKS ASSOCIATED WITH INVESTING IN BONDS
RISKS ASSOCIATED WITH INVESTING IN BONDS 1 Risks Associated with Investing in s Interest Rate Risk Effect of changes in prevailing market interest rate on values. As i B p. Credit Risk Creditworthiness
More informationLecture 4. The Bond Market. Mingzhu Wang SKKU ISS 2017
Lecture 4 The Bond Market Mingzhu Wang SKKU ISS 2017 Bond Terminologies 2 Agenda Types of Bonds 1. Treasury Notes and Bonds 2. Municipal Bonds 3. Corporate Bonds Financial Guarantees for Bonds Current
More informationMBF2253 Modern Security Analysis
MBF2253 Modern Security Analysis Prepared by Dr Khairul Anuar L9: Bonds and Bonds Valuation www.notes638.wordpress.com What is Bond Market? The bond market is a financial market where participants buy
More informationChapter 11. Section 2: Bonds & Other Financial Assets
Chapter 11 Section 2: Bonds & Other Financial Assets Bonds as Financial Assets Bonds are basically loans, or IOUs, that represent debt that the government or a corporation must repay to an investor. Typically
More informationDEBT VALUATION AND INTEREST. Chapter 9
DEBT VALUATION AND INTEREST Chapter 9 Principles Applied in This Chapter Principle 1: Money Has a Time Value. Principle 2: There is a Risk-Return Tradeoff. Principle 3: Cash Flows Are the Source of Value
More informationFixed Income Investment
Fixed Income Investment Session 1 April, 24 th, 2013 (Morning) Dr. Cesario Mateus www.cesariomateus.com c.mateus@greenwich.ac.uk cesariomateus@gmail.com 1 Lecture 1 1. A closer look at the different asset
More informationBOND NOTES BOND TERMS
BOND NOTES DEFINITION: A bond is a commitment by the issuer (the company that is borrowing the money) to pay a rate of interest for a pre-determined period of time. By selling bonds, the issuing company
More informationFocus on. Fixed Income. Member SIPC 1 MKD-3360L-A-SL EXP 31 JUL EDWARD D. JONES & CO, L.P. ALL RIGHTS RESERVED.
Focus on Fixed Income www.edwardjones.com Member SIPC 1 5 HOW CAN I STAY ON TRACK? 4 HOW DO I GET THERE? 1 WHERE AM I TODAY? MY FINANCIAL NEEDS 3 CAN I GET THERE? 2 WHERE WOULD I LIKE TO BE? 2 Our Objectives
More informationFixed income for your portfolio
Fixed income for your portfolio November 2017 2 Fixed income for your portfolio Defence Fixed income investments such as bonds are widely used in portfolios to enhance income and compliment low risk interest
More informationRisk and Term Structure of Interest Rates
Risk and Term Structure of Interest Rates Economics 301: Money and Banking 1 1.1 Goals Goals and Learning Outcomes Goals: Explain factors that can cause interest rates to be different for bonds of different
More informationTime Value of Money. Part III. Outline of the Lecture. September Growing Annuities. The Effect of Compounding. Loan Type and Loan Amortization
Time Value of Money Part III September 2003 Outline of the Lecture Growing Annuities The Effect of Compounding Loan Type and Loan Amortization 2 Growing Annuities The present value of an annuity in which
More informationChapter 10. The Bond Market
Chapter 10 The Bond Market Chapter Preview In this chapter, we focus on longer-term securities: bonds. Bonds are like money market instruments, but they have maturities that exceed one year. These include
More informationSecurity Analysis. Bond Valuation
Security Analysis Bond Valuation Background on Bonds Bonds represent long-term debt securities Contractual Promise to pay future cash flows to investors The issuer of the bond is obligated to pay: Interest
More informationStudy Session 16. Fixed Income Analysis and Valuation
Study Session 16 Fixed Income Analysis and Valuation Fixed Income: Analysis and Valuation 56. Valuation of Debt Securities Fixed Income Investments LOS 56.b Describe CFAI p. 448, Schweser p. 87 Valuation
More informationCFAspace. CFA Level I. Provided by APF. Academy of Professional Finance 专业金融学院 FIXED INCOME: Lecturer: Nan Chen
CFAspace Provided by APF CFA Level I FIXED INCOME: Introduction to the Valuation of Debt Securities Lecturer: Nan Chen Framework Estimate CFs: Coupon and Principal 1. Steps in Bond Valuation Process Determine
More informationA 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 informationMunicipal Bond Basics
Weller Group LLC Timothy Weller, CFP CERTIFIED FINANCIAL PLANNER 6206 Slocum Road Ontario, NY 14519 315-524-8000 tim@wellergroupllc.com www.wellergroupllc.com Municipal Bond Basics March 06, 2016 Page
More informationAn Introduction to Bonds
An Introduction to Bonds Agenda Bond basics Different types of bonds Bond features Yield and tax considerations Bond risks Credit quality Bond investing strategies and client suitability Defining Characteristics
More information[Image of Investments: Analysis and Behavior textbook]
Finance 527: Lecture 19, Bond Valuation V1 [John Nofsinger]: This is the first video for bond valuation. The previous bond topics were more the characteristics of bonds and different kinds of bonds. And
More informationBonds and Other Financial Instruments
SECTION 4 Bonds and Other Financial Instruments OBJECTIVES KEY TERMS TAKING NOTES In Section 4, you will discuss why people buy bonds describe the different kinds of bonds explain the factors that affect
More informationGlobal Financial Management
Global Financial Management Bond Valuation Copyright 24. All Worldwide Rights Reserved. See Credits for permissions. Latest Revision: August 23, 24. Bonds Bonds are securities that establish a creditor
More informationChapter 9 Debt Valuation and Interest Rates
Chapter 9 Debt Valuation and Interest Rates Slide Contents Learning Objectives Principles Used in This Chapter 1.Overview of Corporate Debt 2.Valuing Corporate Debt 3.Bond Valuation: Four Key Relationships
More informationFixed-Income Securities: Defining Elements
The following is a review of the Fixed Income: Basic Concepts principles designed to address the learning outcome statements set forth by CFA Institute. Cross-Reference to CFA Institute Assigned Reading
More informationChapter 12. The Bond Market
Chapter 12 The Bond Market Chapter Preview In this chapter, we focus on longer-term securities: bonds. Bonds are like money market instruments, but they have maturities that exceed one year. These include
More informationDebt markets. International Financial Markets. International Financial Markets
Debt markets Outline Instruments Participants Yield curve Risks 2 Debt instruments Bank loans most typical Reliance on private information Difficult to transfert to third party Government and commercial
More informationCHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
CHAPTER : THE TERM STRUCTURE OF INTEREST RATES. Expectations hypothesis: The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is explained
More informationUnderstanding Interest Rates
Money & Banking Notes Chapter 4 Understanding Interest Rates Measuring Interest Rates Present Value (PV): A dollar paid to you one year from now is less valuable than a dollar paid to you today. Why? -
More informationCorporate Finance. Dr Cesario MATEUS.
Corporate Finance Dr Cesario MATEUS www.cesariomateus.com Session 1 13.03.2015 Module Introduction to Corporate Finance The Objective Function in Corporate Finance Present Value and Related Metrics Risk
More informationBBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar
BBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar L6: The Bond Market www. notes638.wordpress.com 6-1 Chapter Preview In this chapter, we focus on longer-term securities: bonds. Bonds
More informationBONDS AND CREDIT RATING
BONDS AND CREDIT RATING 2017 1 Typical Bond Features The indenture - a written agreement between the borrower and a trust company - usually lists Amount of Issue, Date of Issue, Maturity Denomination (Par
More informationPart III : Debt Securities. o Bond Prices and Yields o Managing Bond Portfolios
Part III : Debt Securities o Bond Prices and Yields o Managing Bond Portfolios Bond Prices and Yields Chapter 0 Bond Characteristics A long-term debt instrument in which a borrower agrees to make payments
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Chapter 6: Valuing stocks Bond Cash Flows, Prices, and Yields - Maturity date: Final payment date - Term: Time remaining until
More informationChapter. Corporate Bonds. Corporate Bonds. Corporate Bond Basics, I. Corporate Bond Basics, II. Corporate Bond Basics, III. Types of Corporate Bonds
Chapter 18 Corporate Bonds Corporate Bonds Our goal in this chapter is to introduce the specialized knowledge concerning trading corporate bonds. Money managers who buy and sell corporate bonds possess
More informationHow to Make Money. Building your Own Portfolio. Alexander Lin Joey Khoury. Professor Karl Shell ECON 4905
How to Make Money Building your Own Portfolio Alexander Lin Joey Khoury Professor Karl Shell ECON 4905 Agenda Types of Stock Fixed Income Securities Portfolio Maximization and Macroeconomic Considerations
More informationMS-E2114 Investment Science Lecture 2: Fixed income securities
MS-E2114 Investment Science Lecture 2: Fixed income securities A. Salo, T. Seeve Systems Analysis Laboratory Department of System Analysis and Mathematics Aalto University, School of Science Overview Financial
More informationBond Prices and Yields
Bond Prices and Yields BKM 10.1-10.4 Eric M. Aldrich Econ 133 UC Santa Cruz Bond Basics A bond is a financial asset used to facilitate borrowing and lending. A borrower has an obligation to make pre-specified
More informationBond Analysis, Portfolio Strategies, and Trade Executions AAII Washington, DC Chapter December 6, 2008
Bond Analysis, Portfolio Strategies, and Trade Executions AAII Washington, DC Chapter December 6, 2008 Presented by Bob Pugh, CFA President, Insight Wealth Management www.insightwealth.com This slide show,
More informationPurpose of the Capital Market
BOND MARKETS Purpose of the Capital Market Original maturity is greater than one year, typically for long-term financing or investments Best known capital market securities: Stocks and bonds Capital Market
More informationBBK3413 Investment Analysis
BBK3413 Investment Analysis Topic 4 Fixed Income Securities www.notes638.wordpress.com Content 7.1 CHARACTERISTICS OF BOND 7.2 RISKS ASSOCIATED WITH BONDS 7.3 BOND PRICING 7.4 BOND YIELDS 7.5 VOLATILITY
More information1. Why is it important for corporate managers to understand how bonds and shares are priced?
CHAPTER 4 CONCEPT REVIEW QUESTIONS 1. Why is it important for corporate managers to understand how bonds and shares are priced? Managers need to know this because (1) firms regularly issue stocks and bonds
More informationChapter 07 Interest Rates and Bond Valuation
Chapter 07 Interest Rates and Bond Valuation Multiple Choice Questions 1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? A. coupon B. face value C. discount D. call
More informationFUNDAMENTALS OF CREDIT ANALYSIS
FUNDAMENTALS OF CREDIT ANALYSIS 1 MV = Market Value NOI = Net Operating Income TV = Terminal Value RC = Replacement Cost DSCR = Debt Service Coverage Ratio 1. INTRODUCTION CR = Credit Risk Y.S = Yield
More informationCHAPTER 4 TIME VALUE OF MONEY
CHAPTER 4 TIME VALUE OF MONEY 1 Learning Outcomes LO.1 Identify various types of cash flow patterns (streams) seen in business. LO.2 Compute the future value of different cash flow streams. Explain the
More informationChapter 4. The Valuation of Long-Term Securities
Chapter 4 The Valuation of Long-Term Securities 4-1 Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI After
More information: Corporate Finance. Corporate Decisions
380.760: Corporate Finance Lecture 6: Corporate Financing Professor Gordon M. Bodnar 2009 Gordon Bodnar, 2009 Corporate Decisions Investment decision vs. financing decision until now we have focused on
More informationBOND ANALYTICS. Aditya Vyas IDFC Ltd.
BOND ANALYTICS Aditya Vyas IDFC Ltd. Bond Valuation-Basics The basic components of valuing any asset are: An estimate of the future cash flow stream from owning the asset The required rate of return for
More informationCorporate Finance. Dr Cesario MATEUS.
Corporate Finance Dr Cesario MATEUS www.cesariomateus.com Session 1 06.02.2015 Module Introduction to Corporate Finance The Objective Function in Corporate Finance Present Value and Related Metrics Risk
More information1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
Chapter 02 Determinants of Interest Rates True / False Questions 1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
More informationQCU and Exercises for Part 2 : 20 QCU (only one answer is right) and 1 Exercise. Session 4 : Shares Session 5 : Bonds. Corporate Finance.
QCU and Exercises for Part 2 : 20 QCU (only one answer is right) and 1 Exercise Session 4 : Shares Session 5 : Bonds Corporate Finance Master 1 2012-2013 All campuses 1 20 QCU Use the information for the
More informationBonds explained. Member of the London Stock Exchange
Bonds explained Member of the London Stock Exchange Killik & Co We pride ourselves on being a relationship firm. Each client has their own dedicated Broker, who acts as the single point of contact to provide
More informationINVESTMENTS. Instructor: Dr. Kumail Rizvi, PhD, CFA, FRM
INVESTMENTS Instructor: Dr. KEY CONCEPTS & SKILLS Understand bond values and why they fluctuate How Bond Prices Vary With Interest Rates Four measures of bond price sensitivity to interest rate Maturity
More informationMoney and Banking. Semester 1/2016
Money and Banking Semester 1/2016 Score Allocation Quizzes 10% Mid-Term Exam 30% Final Exam 30% Individual and Group Reports 20% Class Participation 10% >>> Total 100% Classroom Disciplines I expect regular
More informationJEM034 Corporate Finance Winter Semester 2017/2018
JEM034 Corporate Finance Winter Semester 2017/2018 Lecture #1 Olga Bychkova Topics Covered Today Review of key finance concepts Present value (chapter 2 in BMA) Valuation of bonds (chapter 3 in BMA) Present
More informationCredit Risk II. Bjørn Eraker. April 12, Wisconsin School of Business
Wisconsin School of Business April 12, 2012 More on Credit Risk Ratings Spread measures Specific: Bloomberg quotes for Best Buy Model of credit migration Ratings The three rating agencies Moody s, Fitch
More informationDebt underwriting and bonds
Debt underwriting and bonds 1 A bond is an instrument issued for a period of more than one year with the purpose of raising capital by borrowing Debt underwriting includes the underwriting of: Government
More informationStudy Session 16. Fixed Income Analysis and Valuation
Study Session 16 Fixed Income Analysis and Valuation 332 Study Session 16 Fixed Income Analysis and Valuation Fixed Income: Analysis and Valuation 56. Valuation of Debt Securities Fixed Income Investments
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 informationBUSI 370 Business Finance
Review Session 2 February 7 th, 2016 Road Map 1. BONDS 2. COMMON SHARES 3. PREFERRED SHARES 4. TREASURY BILLS (T Bills) ANSWER KEY WITH COMMENTS 1. BONDS // Calculate the price of a ten-year annual pay
More informationACCOUNTING - CLUTCH CH LONG TERM LIABILITIES.
!! www.clutchprep.com CONCEPT: INTRODUCTION TO BONDS AND BOND CHARACTERISTICS Bonds Payable are groups of debt securities issued to lenders Example: Company wants to raise $1,000,000. The company can sell
More informationInterest Rate Swaps Product Disclosure Statement. Issued by Westpac Banking Corporation ABN AFSL
Interest Rate Swaps Product Disclosure Statement Issued by Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 Dated: 22 September 2017. This is a replacement product disclosure statement. It replaces
More information