Cheryl Mew FINS2624 Portfolio Management Semester 1, 2011 LECTURE 1 BOND PRICING
|
|
- Ann Whitehead
- 5 years ago
- Views:
Transcription
1 LETURE 1 BOND PRIING WHAT IS A BOND? A bond is a claim on some fixed future cash flows. A commonwealth government bond (GB) is a bond which pays semi-annual coupons, in which the maturity date/ coupon payment date is on the 15 th of every month. A zero coupon bond is a bond with no coupons. The important information of a bond: 1. Transaction date: T 2. Settlement date:t+2 3. oupon payment dates 4. Maturity date 5. YTM 6. oupon rate um-interest or Ex-interest? 1. If<=7 days to the next coupon payment-----> ex-interest 2. If> 7 days to the next coupon payment-----> cum-interest YIELD TO MATURITY The Yield to Maturity (YTM) of a bond is: Interest rate that makes the present value of the bond s payments equal to its price. Determined by the market, reflecting annual rate of return required by market. The Relationship between YTM and Bond Price: YTM = Price AND Price Sensitivity YTM = Price AND Price Sensitivity When YTM = = 10%, P = FV = $100 o = YTM, P = FV Par Bond o < YTM, P < FV Discount Bond o > YTM, P > FV Premium Bond NO ARBITRAGE PRINIPLE An arbitrage is a set of trades that generate zero cash flows in the future, but a positive and risk free cash flow today. This is done through the violation of law of one price. An arbitrage trade is done by selling the real instrument, and buying a synthetic instrument (replicating strategies or portfolios). By constructing a synthetic bond and buy the under-priced real bond and selling 1
2 overpriced synthetic bond, an arbitrage opportunity exists, where people can earn money, whilst not incurring any risk. In Fins 2624, we employ the No Arbitrage Principle i.e. same bonds will have the price. BOND PRIING The value of a bond (like any financial security) is the present value of all future cash flows. A bond produces two different cash flows: - oupon payments - Face value (paid at maturity) Thus all we have to do is find the present value of all coupon payments and the face value! P0 = ( 1 1+ ) + 1+ = oupon r = required rate of return (YTM) t = time periods Make sure that you use the correct periodic required rate of return and periods e.g. A 5 year GB bond that pays coupons on a semi-annual basis, has an annual required rate of return of 20%. t in this case will be 10 *5 x 2+ and r in this case will be 10% *20%/2+ since payments are made semiannually!!! EX-INTEREST BONDS BG Bonds are ex-interest if the settlement date (2 days after transaction date) is within 7 days of the next coupon payment. ALULATING THE PRIE OF AN EX-INTEREST BOND 1. alculate the Value of the Bond as at oupon Date = P P = ( 1 1+ ) Find fraction of period before coupon payment = f = (coupon settlement date) / total days in period 3. Discount P to find the Price as at settlement date = P P = P 1+r f 2
3 QUOTED PRIE OF EX-INTEREST BOND By convention, the market does not quote the settlement price P. This is because, if we were the buyer, and the interest was continuous, we would get some of the interest, even though it s ex-interest. Hence, the market price = P adj P adj = P + PP. f UM-INTEREST BONDS BG Bonds are cum-interest if the settlement date (2 days after transaction date) is more 7 days until the next coupon payment. ALULATING THE PRIE OF A UM-INTEREST BOND 1. alculate the Value of the Bond as at oupon Date = P P = ( 1 1+ ) Find fraction of period before coupon payment = f = (coupon settlement date) / total days in period 3. Discount P + the next coupon to find the Price as at settlement date = P P = P +PP 1+r f QUOTED PRIE OF EX-INTEREST BOND By convention, the market does not quote the settlement price P. This is because, if we were the buyer, and the interest was continuous, we would get lose of the interest, even though it s cum-interest. Hence, the market price = P adj P adj = P PP. 1 f 3
4 LETURE 2 TERM STRUTURE OF INTEREST RATES YTM AND HPR Yield to maturity (YTM) reflects the return required and set by the market on the assumption that the bond is held to maturity. In equilibrium, it is also the return that investors can expect to earn over the life of the bond. Holding Period Return (HPR) is the expected return over a future period, and is not based on the assumption that the bond is held to maturity. SIMILARITIES Both expressed as annualised returns (not effective rates) Use the settlement price as cost base Total returns accounting for both the coupon interest component and the capital gain/loss component DIFFERENES YTM is observed and set by the market, HRP is not YTM assumes that coupon interests are all invested at the same rate as quoted YTM, HPR allows for different reinvestment interest rates received at different times YTM assumes that bond is held to maturity, HPR assumes that bond is to be sold before maturity ALULATING HPR HRP is used for comparing the expected return among alternate investments over the same predetermined holding period. However, to accomplish this task, future interest rates for different lengths are required. P0(1 + HPR m )t = It + Pt P 0 current price of the bond; m the number of coupon interest payments in 1 year; t the number of holding periods; I t the total coupon interest and reinvestment income; P t the price of the bond after t periods; I t + PI t = Terminal Value of the investment TERM STRUTURE OF INTEREST RATES The Term Structure of Interest Rates shows the relationship between the yield and time the maturity of bonds that belong to the same risk class at the same point in time. It is commonly displayed graphically as the yield curve (graph that shows the relationship between yield and maturity). Nb. The shape of the yield curve can change over time as market participants continuously revise their expectations on future inflation, which is one of the key determinants of interest rates. 4
5 The Term Structure of Interest Rates offers investors an objective way of inferring future interest rates from the yield curve. These future interest rates are called forward rates, denoted f(n,t) the rate of a n year bond in t years. For example, f(2,3) is the interest rate of a 2 year bond in 3 years time. YTM, SPOT RATES AND FORWARD RATES YTM Yield to maturity of a general coupon bond Spot Rates (SR) urrent Interest Rates period annual rate Yield of maturity of zero-coupon rate From time 0 to period t Forward rates (FR) Future interest rates implied by the term structure objective rollover rate- intermediate In between 2 periods P = 1+YTM + +FV 1+YTM 2 = + +FV = 1+SP1 1+SP2 2 1+FR1 + +FV 1+FR1 1+FR2 THE RELATIONSHIP BETWEEN FORWARD RATES AND SPOT RATES (1 y ) 1) n n ( 1 fn) n1 (1 yn f n = y n = one-year forward rate for period n spot rate/yield for a security with a maturity of n Example: Look at Henry Yip s Textbook pg SPOT RATES AND TERM STRUTURE OF ZERO OUPON BONDS The term structure of coupon bonds may also be used to infer yields to maturity of zero-coupon bonds. These yields are known as spot rates in the marketplace. If investors buy and hold a zero coupon bond to maturity, they know the cost and are certain of the amount received at maturity. The price P 0 is based on the spot rate, and there are no coupons, so the terminal value received at the end of maturity is certain. This means that spot rate is a risk-free rate. 5
FINS2624 Summary. 1- Bond Pricing. 2 - The Term Structure of Interest Rates
FINS2624 Summary 1- Bond Pricing Yield to Maturity: The YTM is a hypothetical and constant interest rate which makes the PV of bond payments equal to its price; considered an average rate of return. It
More informationFoundations of Finance
Lecture 7: Bond Pricing, Forward Rates and the Yield Curve. I. Reading. II. Discount Bond Yields and Prices. III. Fixed-income Prices and No Arbitrage. IV. The Yield Curve. V. Other Bond Pricing Issues.
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 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 informationFINS2624: PORTFOLIO MANAGEMENT NOTES
FINS2624: PORTFOLIO MANAGEMENT NOTES UNIVERSITY OF NEW SOUTH WALES Chapter: Table of Contents TABLE OF CONTENTS Bond Pricing 3 Bonds 3 Arbitrage Pricing 3 YTM and Bond prices 4 Realized Compound Yield
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 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 informationCHAPTER 15. The Term Structure of Interest Rates INVESTMENTS BODIE, KANE, MARCUS
CHAPTER 15 The Term Structure of Interest Rates McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 15-2 Overview of Term Structure The yield curve is a graph that
More informationChapter 2: BASICS OF FIXED INCOME SECURITIES
Chapter 2: BASICS OF FIXED INCOME SECURITIES 2.1 DISCOUNT FACTORS 2.1.1 Discount Factors across Maturities 2.1.2 Discount Factors over Time 2.1 DISCOUNT FACTORS The discount factor between two dates, t
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 informationSolutions For the benchmark maturity sectors in the United States Treasury bill markets,
FIN 684 Professor Robert Hauswald Fixed-Income Analysis Kogod School of Business, AU Solutions 1 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the
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 informationINV3702 INVESTMENTS: FIXED INCOME ANALYSIS EXAM MEMO MAY/JUNE 2012
INV3702 INVESTMENTS: FIXED INCOME ANALYSIS EXAM MEMO MAY/JUNE 2012 SECTION A: MULTIPLE CHOICE QUESTIONS (30 MARKS) *THERE MAY BE MINOR EDITORIAL DIFFERENCES BETWEEN THE QUESTIONS IN THIS MEMO AND THOSE
More informationCHAPTER 15. The Term Structure of Interest Rates INVESTMENTS BODIE, KANE, MARCUS
CHAPTER 15 The Term Structure of Interest Rates INVESTMENTS BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. INVESTMENTS BODIE, KANE, MARCUS
More informationLecture 8 Foundations of Finance
Lecture 8: Bond Portfolio Management. I. Reading. II. Risks associated with Fixed Income Investments. A. Reinvestment Risk. B. Liquidation Risk. III. Duration. A. Definition. B. Duration can be interpreted
More informationACI THE FINANCIAL MARKETS ASSOCIATION
ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARD-FORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE 7 OPTIONS 8
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 informationPricing Fixed-Income Securities
Pricing Fixed-Income Securities The Relationship Between Interest Rates and Option- Free Bond Prices Bond Prices A bond s price is the present value of the future coupon payments (CPN) plus the present
More informationChapter 10: Futures Arbitrage Strategies
Chapter 10: Futures Arbitrage Strategies I. Short-Term Interest Rate Arbitrage 1. Cash and Carry/Implied Repo Cash and carry transaction means to buy asset and sell futures Use repurchase agreement/repo
More informationBonds. 14 t. $40 (9.899) = $ $1,000 (0.505) = $ Value = $ t. $80 (4.868) + $1,000 (0.513) Value = $
Bonds Question 1 If interest rates in all maturities increase by one percent what will happen to the price of these bonds? a. The price of shorter maturity bond and the long maturity bond will fall by
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 informationMFE8812 Bond Portfolio Management
MFE8812 Bond Portfolio Management William C. H. Leon Nanyang Business School January 16, 2018 1 / 63 William C. H. Leon MFE8812 Bond Portfolio Management 1 Overview Value of Cash Flows Value of a Bond
More informationChapter 7. Interest Rate Forwards and Futures. Copyright 2009 Pearson Prentice Hall. All rights reserved.
Chapter 7 Interest Rate Forwards and Futures Bond Basics U.S. Treasury Bills (
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 informationSECTION HANDOUT #1 : Review of Topics
SETION HANDOUT # : Review of Topics MBA 0 October, 008 This handout contains some of the topics we have covered so far. You are not required to read it, but you may find some parts of it helpful when you
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 informationFinancial Market Introduction
Financial Market Introduction Alex Yang FinPricing http://www.finpricing.com Summary Financial Market Definition Financial Return Price Determination No Arbitrage and Risk Neutral Measure Fixed Income
More informationFoundations of Finance
Lecture 9 Lecture 9: Theories of the Yield Curve. I. Reading. II. Expectations Hypothesis III. Liquidity Preference Theory. IV. Preferred Habitat Theory. Lecture 9: Bond Portfolio Management. V. Reading.
More informationSECTION A: MULTIPLE CHOICE QUESTIONS. 1. All else equal, which of the following would most likely increase the yield to maturity on a debt security?
SECTION A: MULTIPLE CHOICE QUESTIONS 2 (40 MARKS) 1. All else equal, which of the following would most likely increase the yield to maturity on a debt security? 1. Put option. 2. Conversion option. 3.
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 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 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 informationChapter 7: Interest Rates and Bond Valuation, Part II
Chapter 7: Interest Rates and Bond Valuation, Part II Faculty of Business Administration Lakehead University Spring 2003 May 15, 2003 Outline 7A-C Review Questions 7.2 More on Bond Features 7.3 Bond Ratings
More informationSECURITY VALUATION BOND VALUATION
SECURITY VALUATION BOND VALUATION When a corporation (or the government) wants to borrow money, it often sells a bond. An investor gives the corporation money for the bond, and the corporation promises
More informationChapter. Bond Basics, I. Prices and Yields. Bond Basics, II. Straight Bond Prices and Yield to Maturity. The Bond Pricing Formula
Chapter 10 Bond Prices and Yields Bond Basics, I. A Straight bond is an IOU that obligates the issuer of the bond to pay the holder of the bond: A fixed sum of money (called the principal, par value, or
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 informationINV2601 DISCUSSION CLASS SEMESTER 2 INVESTMENTS: AN INTRODUCTION INV2601 DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING
INV2601 DISCUSSION CLASS SEMESTER 2 INVESTMENTS: AN INTRODUCTION INV2601 DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING Examination Duration of exam 2 hours. 40 multiple choice questions. Total marks
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 informationINTRODUCTION TO FINANCIAL AND ACTUARIAL MATHEMATICS. Marek Šulista, Václav Nýdl, Gregory Moore
INTRODUCTION TO FINANCIAL AND ACTUARIAL MATHEMATICS Marek Šulista, Václav Nýdl, Gregory Moore 2 Text vznikl v rámci grantu FRVŠ 1632/2005. Chapter 1 BONDS Bond or debenture is a debt instrument that obligates
More informationBond and Common Share Valuation
Bond and Common Share Valuation Lakehead University Fall 2004 Outline of the Lecture Bonds and Bond Valuation The Determinants of Interest Rates Common Share Valuation 2 Bonds and Bond Valuation A corporation
More informationLecture 2 Valuation of Fixed Income Securities (a)
Lecture 2 Valuation of Fixed Income Securities (a) Since we all now have a basic idea of how time value of money works, it is time we put the techniques we learned to some use 1 Fixed Income Securities
More informationBOND VALUATION. YTM Of An n-year Zero-Coupon Bond
BOND VALUATION BOND VALUATIONS BOND: A security sold by governments and corporations to raise money from investors today in exchange for promised future payments 1. ZERO COUPON BONDS ZERO COUPON BONDS:
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 informationDUKE UNIVERSITY The Fuqua School of Business. Financial Management Spring 1989 TERM STRUCTURE OF INTEREST RATES*
DUKE UNIVERSITY The Fuqua School of Business Business 350 Smith/Whaley Financial Management Spring 989 TERM STRUCTURE OF INTEREST RATES* The yield curve refers to the relation between bonds expected yield
More informationChapters 10&11 - Debt Securities
Chapters 10&11 - Debt Securities Bond characteristics Interest rate risk Bond rating Bond pricing Term structure theories Bond price behavior to interest rate changes Duration and immunization Bond investment
More informationBonds and Common Stock
Bonds and Common Stock Bonds 2/22 Yield-To-Maturity Yield-To-Maturity (YTM) is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) equal the price of the bond.
More informationChapter 3 Mathematics of Finance
Chapter 3 Mathematics of Finance Section R Review Important Terms, Symbols, Concepts 3.1 Simple Interest Interest is the fee paid for the use of a sum of money P, called the principal. Simple interest
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 informationInterest Rate Forwards and Swaps
Interest Rate Forwards and Swaps 1 Outline PART ONE Chapter 1: interest rate forward contracts and their pricing and mechanics 2 Outline PART TWO Chapter 2: basic and customized swaps and their pricing
More informationSANJAY SARAF. 10 Marks. Ans.
Q1) Quality Marine Products (P) Ltd., Kolkata imported deep freezing equipment from Holland. The company has a choice to invoice in the following currencies The company has the choice to pay at the end
More informationInvestment Analysis (FIN 383) Fall Homework 3
Investment Analysis (FIN 383) Fall 2009 Homework 3 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit The due date is Tuesday,
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 informationFinancial Market Analysis (FMAx) Module 2
Financial Market Analysis (FMAx) Module 2 Bond Pricing This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for Capacity Development
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended January 28, 2018 (the 2017 fiscal
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 informationSAMPLE FINAL QUESTIONS. William L. Silber
SAMPLE FINAL QUESTIONS William L. Silber HOW TO PREPARE FOR THE FINAL: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below, make
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended January 27, 2017 (the 2016 fiscal
More informationB6302 Sample Placement Exam Academic Year
Revised June 011 B630 Sample Placement Exam Academic Year 011-01 Part 1: Multiple Choice Question 1 Consider the following information on three mutual funds (all information is in annualized units). Fund
More informationAlan Brazil. Goldman, Sachs & Co.
Alan Brazil Goldman, Sachs & Co. Assumptions: Coupon paid every 6 months, $100 of principal paid at maturity, government guaranteed 1 Debt is a claim on a fixed amount of cashflows in the future A mortgage
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 informationBond Analysis & Valuation Solutions
Bond Analysis & Valuation s Category of Problems 1. Bond Price...2 2. YTM Calculation 14 3. Duration & Convexity of Bond 30 4. Immunization 58 5. Forward Rates & Spot Rates Calculation... 66 6. Clean Price
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 informationFINANCING IN INTERNATIONAL MARKETS
FINANCING IN INTERNATIONAL MARKETS 3. BOND RISK MANAGEMENT Forward Price of a Coupon Bond Consider the following transactions at time T=0: i. Borrow for T 2 days at an interest rate r 2. ii. Buy a coupon
More informationCHAPTER 5: LEARNING ABOUT RETURN AND RISK FROM THE HISTORICAL RECORD
CHAPTER 5: LEARNING ABOUT RETURN AND RISK FROM THE HISTORICAL RECORD PROBLEM SETS 1. The Fisher equation predicts that the nominal rate will equal the equilibrium real rate plus the expected inflation
More informationLecture 9. Basics on Swaps
Lecture 9 Basics on Swaps Agenda: 1. Introduction to Swaps ~ Definition: ~ Basic functions ~ Comparative advantage: 2. Swap quotes and LIBOR zero rate ~ Interest rate swap is combination of two bonds:
More informationAFTERNOON SESSION. Date: Wednesday, April 26, 2017 Time: 1:30 p.m. 3:45 p.m. INSTRUCTIONS TO CANDIDATES
SOCIETY OF ACTUARIES Exam QFICORE AFTERNOON SESSION Date: Wednesday, April 26, 2017 Time: 1:30 p.m. 3:45 p.m. INSTRUCTIONS TO CANDIDATES General Instructions 1. This afternoon session consists of 7 questions
More informationChapter 4 Interest Rate Measurement and Behavior Chapter 5 The Risk and Term Structure of Interest Rates
Chapter 4 Interest Rate Measurement and Behavior Chapter 5 The Risk and Term Structure of Interest Rates Fisher Effect (risk-free rate) Interest rate has 2 components: (1) real rate (2) inflation premium
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 informationPortfolio Management Philip Morris has issued bonds that pay coupons annually with the following characteristics:
Portfolio Management 010-011 1. a. Critically discuss the mean-variance approach of portfolio theory b. According to Markowitz portfolio theory, can we find a single risky optimal portfolio which is suitable
More informationLecture Notes 18: Review Sample Multiple Choice Problems
Lecture Notes 18: Review Sample Multiple Choice Problems 1. Assuming true-model returns are identically independently distributed (i.i.d), which events violate market efficiency? I. Positive correlation
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 informationGlobal Financial Management. Option Contracts
Global Financial Management Option Contracts Copyright 1997 by Alon Brav, Campbell R. Harvey, Ernst Maug and Stephen Gray. All rights reserved. No part of this lecture may be reproduced without the permission
More informationFinancial Market Analysis (FMAx) Module 1
Financial Market Analysis (FMAx) Module 1 Pricing Money Market Instruments This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for Capacity
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 informationWHY DO INTEREST RATES CHANGE? Luigi Vena 02/22/2017 LIUC Università Cattaneo
WHY DO INTEREST RATES CHANGE? Luigi Vena 02/22/2017 LIUC Università Cattaneo TODAY S AGENDA Debt and Bonds Changes in interest rates Supply and demand in the bond market Yield curve Spot and forward contracts
More information22. Construct a bond amortization table for a $1000 two-year bond with 7% coupons paid semi-annually bought to yield 8% semi-annually.
Chapter 6 Exercises 22. Construct a bond amortization table for a $1000 two-year bond with 7% coupons paid semi-annually bought to yield 8% semi-annually. 23. Construct a bond amortization table for a
More informationProblems and Solutions
1 CHAPTER 1 Problems 1.1 Problems on Bonds Exercise 1.1 On 12/04/01, consider a fixed-coupon bond whose features are the following: face value: $1,000 coupon rate: 8% coupon frequency: semiannual maturity:
More informationUNIVERSITY OF TORONTO Joseph L. Rotman School of Management SOLUTIONS. C (1 + r 2. 1 (1 + r. PV = C r. we have that C = PV r = $40,000(0.10) = $4,000.
UNIVERSITY OF TORONTO Joseph L. Rotman School of Management RSM332 PROBLEM SET #2 SOLUTIONS 1. (a) The present value of a single cash flow: PV = C (1 + r 2 $60,000 = = $25,474.86. )2T (1.055) 16 (b) The
More informationLecture 20: Bond Portfolio Management. I. Reading. A. BKM, Chapter 16, Sections 16.1 and 16.2.
Lecture 20: Bond Portfolio Management. I. Reading. A. BKM, Chapter 16, Sections 16.1 and 16.2. II. Risks associated with Fixed Income Investments. A. Reinvestment Risk. 1. If an individual has a particular
More informationTerm Structure of Interest Rates
Term Structure of Interest Rates No Arbitrage Relationships Professor Menelaos Karanasos December 20 (Institute) Expectation Hypotheses December 20 / The Term Structure of Interest Rates: A Discrete Time
More informationECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Spring 2018 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
More informationSECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. 2) A bond is a security which typically offers a combination of two forms of payments:
Solutions to Problem Set #: ) r =.06 or r =.8 SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT PVA[T 0, r.06] j 0 $8000 $8000 { {.06} t.06 &.06 (.06) 0} $8000(7.36009) $58,880.70 > $50,000 PVA[T 0, r.8] $8000(4.49409)
More informationInterest Rate Markets
Interest Rate Markets 5. Chapter 5 5. Types of Rates Treasury rates LIBOR rates Repo rates 5.3 Zero Rates A zero rate (or spot rate) for maturity T is the rate of interest earned on an investment with
More informationMonetary Economics Fixed Income Securities Term Structure of Interest Rates Gerald P. Dwyer November 2015
Monetary Economics Fixed Income Securities Term Structure of Interest Rates Gerald P. Dwyer November 2015 Readings This Material Read Chapters 21 and 22 Responsible for part of 22.2, but only the material
More informationSavings and Investment. July 23, 2014
Savings and Investment July 23, 2014 Personal Financial Planning Process The personal financial planning process includes four main elements: Setting financial goals; Financial assessment; Developing and
More informationLecture Notes 2. XII. Appendix & Additional Readings
Foundations of Finance: Concepts and Tools for Portfolio, Equity Valuation, Fixed Income, and Derivative Analyses Professor Alex Shapiro Lecture Notes 2 Concepts and Tools for Portfolio, Equity Valuation,
More information4. D Spread to treasuries. Spread to treasuries is a measure of a corporate bond s default risk.
www.liontutors.com FIN 301 Final Exam Practice Exam Solutions 1. C Fixed rate par value bond. A bond is sold at par when the coupon rate is equal to the market rate. 2. C As beta decreases, CAPM will decrease
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 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 6 : Money Markets
1 Chapter 6 : Money Markets Chapter Objectives Provide a background on money market securities Explain how institutional investors use money markets Explain the globalization of money markets 2 Why so
More informationGround Rules. Guide to the Calculation Methods of the FTSE Actuaries UK Gilts Index Series v3.0
Ground Rules Guide to the Calculation Methods of the FTSE Actuaries UK Gilts Index Series v3.0 ftserussell.com June 2017 Contents 1.0 Introduction... 3 2.0 Management Responsibilities... 9 3.0 Gilts Included
More informationIntroduction to Forwards and Futures
Introduction to Forwards and Futures Liuren Wu Options Pricing Liuren Wu ( c ) Introduction, Forwards & Futures Options Pricing 1 / 27 Outline 1 Derivatives 2 Forwards 3 Futures 4 Forward pricing 5 Interest
More informationCHAPTER 16: MANAGING BOND PORTFOLIOS
CHAPTER 16: MANAGING BOND PORTFOLIOS 1. The percentage change in the bond s price is: Duration 7.194 y = 0.005 = 0.0327 = 3.27% or a 3.27% decline. 1+ y 1.10 2. a. YTM = 6% (1) (2) (3) (4) (5) PV of CF
More informationTerm Structure Lattice Models
IEOR E4706: Foundations of Financial Engineering c 2016 by Martin Haugh Term Structure Lattice Models These lecture notes introduce fixed income derivative securities and the modeling philosophy used to
More informationNational University of Singapore Dept. of Finance and Accounting. FIN 3120A: Topics in Finance: Fixed Income Securities Lecturer: Anand Srinivasan
National University of Singapore Dept. of Finance and Accounting FIN 3120A: Topics in Finance: Fixed Income Securities Lecturer: Anand Srinivasan Course Description: This course covers major topics in
More informationChapter 5. Managing Interest Rate Risk: Duration Gap and Market Value of Equity
Chapter 5 Managing Interest Rate Risk: Duration Gap and Market Value of Equity Duration and price volatility Maturity simply identifies how much time elapses until final payment. It ignores all information
More informationDebt. Last modified KW
Debt The debt markets are far more complicated and filled with jargon than the equity markets. Fixed coupon bonds, loans and bills will be our focus in this course. It's important to be aware of all of
More informationSGI Bond 5Y USD. SGI Bond 5Y USD. Index Rules Version as of 14 January 2008
SGI Bond 5Y USD Index Rules Version as of 14 January 2008 1 1. Index Summary Description: Index description The SGI Bond 5Y USD (the Index ) tracks the performance of a portfolio invested in USD notes
More informationEXAMINATION II: Fixed Income Valuation and Analysis. Derivatives Valuation and Analysis. Portfolio Management
EXAMINATION II: Fixed Income Valuation and Analysis Derivatives Valuation and Analysis Portfolio Management Questions Final Examination March 2016 Question 1: Fixed Income Valuation and Analysis / Fixed
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 information