CHAPTER 5 Bonds and Their Valuation
|
|
- Hester Anthony
- 5 years ago
- Views:
Transcription
1 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 interest rate: Stated interest rate Multiply by par value to get dollars of interest Generally fixed (More ) 3 Maturity: Years until bond must be repaid Declines 4 Issue date: Date when bond was issued 5 Default risk: Risk that issuer will not make interest or principal payments 5-3 How does adding a call provision affect a bond? 5-4 Issuer can refund if rates decline That helps the issuer but hurts the investor Therefore, borrowers are willing to pay more, and lenders require more, on callable bonds Most bonds have a deferred call and a declining call premium PV Financial Asset Valuation n r CF CF + CF ( 1+r ) ( 1+ r ) ( 1+r ) 5-5 Value CF 1 CF 2 CF n 1 n n The discount rate (r i ) is the opportunity cost of capital, ie, the rate that could be earned on alternative investments of equal risk r i r * + IP + LP + MRP + DRP for debt securities 5-6
2 V B What s the value of a 10-year, 10% coupon bond if r d 10%? $100 $1, $ r ( 1+ r d ) ( 1+ r ) d d % V? ( ) ,000 $ $ $38554 $1, , The bond consists of a 10-year, 10% annuity of $100/year plus a $1,000 lump sum at t 10: PV annuity PV maturity value Value of bond $ $1, What would happen if expected inflation rose by 3%, causing r 13%? 5-10 What would happen if inflation fell, and r d declined to 7%? ,21071 When r d rises, above the coupon rate, the bond s value falls below par, so it sells at a discount If coupon rate > r d, price rises above par, and bond sells at a premium Suppose the bond was issued 20 years ago and now has 10 years to maturity What would happen to its value over time if the required rate of return remained at 10%, or at 13%, or at 7%? Bond Value ($) 1,372 1,211 r d 10% 1, r d 7% M r d 13% Years remaining to Maturity
3 5-13 What s yield to maturity? 5-14 At maturity, the value of any bond must equal its par value The value of a premium bond would decrease to $1,000 The value of a discount bond would increase to $1,000 A par bond stays at $1,000 if r d remains constant YTM is the rate of return earned on a bond held to maturity Also called promised yield 5-15 What s the YTM on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887? r d? ,000 PV 1 PV 10 PV M 887 Find r d that works! V B 887 INT M INT N ( + r d) ( 1+ r d ) ( + r d) 90 Find r d , 1+r d ( 1+ r d) ( ) ( 1+ r d) N If coupon rate < r d, bond sells at a discount 5-17 If coupon rate r d, bond sells at its par value If coupon rate > r d, bond sells at a premium If r d rises, price falls Price par at maturity Find YTM if price were $1, Sells at a premium Because coupon 9% > r d 708%, bond s value > par 5-18
4 Current yield Capital gains yield Exp total return Definitions Annual coupon pmt Current price Change in price Beginning price Exp YTM + Curr yld 5-19 Exp cap gains yld 5-20 Find current yield and capital gains yield for a 9%, 10-year bond when the bond sells for $887 and YTM 1091% Current yield $90 $ % 5-21 YTM Current yield + Capital gains yield Cap gains yield YTM - Current yield 1091% % 076% Could also find values in Years 1 and 2, get difference, and divide by value in Year 1 Same answer 5-22 What s interest rate (or price) risk? Does a 1-year or 10-year 10% bond have more risk? Interest rate risk: Rising r d causes bond s price to fall r d 1-year Change 10-year Change 5% $1,048 $1,386 10% 1,000 48% 1, % 15% % % Value 1,500 1, year 1-year Long-term bonds: High interest rate risk, low reinvestment rate risk Short-term bonds: Low interest rate risk, high reinvestment rate risk Nothing is riskless! 0 0% 5% 10% 15% r d
5 True or False: All 10-year bonds have the same price and reinvestment rate risk 5-25 False! Low coupon bonds have less reinvestment rate risk but more price risk than high coupon bonds Semiannual Bonds Multiply years by 2 to get periods 2n 2 Divide nominal rate by 2 to get periodic rate r d /2 3 Divide annual INT by 2 to get PMT INT/2 2n r d /2 OK INT/2 OK 5-27 Find the value of 10-year, 10% coupon, semiannual bond if r d 13% 5-28 You could buy, for $1,000, either a 10%, 10-year, annual payment bond or an equally risky 10%, 10-year semiannual bond Which would you prefer? 2(10) 13/2 100/ The semiannual bond s EFF% is: m i Nom EFF% m % 1025% > 10% EFF% on annual bond, so buy semiannual bond If $1,000 is the proper price for the semiannual bond, what is the proper price for the annual payment bond? Semiannual bond has r Nom 10%, with EFF% 1025% Should earn same EFF% on annual payment bond, so: At a price of $98480, the annual and semiannual bonds would be in equilibrium, because investors would earn EFF% 1025% on either bond
6 What four factors affect the cost of money? Production opportunities Time preferences for consumption Risk Expected inflation Real versus Nominal Rates r* Real risk-free rate T-bond rate if no inflation; 1% to 4% r r RF Any nominal rate Rate on Treasury securities r r* + IP + DRP + LP + MRP Here: r Required rate of return on a debt security r* Real risk-free rate IP Inflation premium DRP Default risk premium LP Liquidity premium MRP Maturity risk premium 5-33 Premiums Added to r* for Different Types of Debt 5-34 ST Treasury: only IP for ST inflation LT Treasury: IP for LT inflation, MRP ST corporate: ST IP, DRP, LP LT corporate: IP, DRP, MRP, LP 5-35 Bond Ratings Provide One Measure of Default Risk What factors affect default risk and bond ratings? 5-36 Investment Grade Junk Bonds Moody s Aaa Aa A Baa Ba B Caa C S&P AAA AA A BBB BB B CCC D Financial performance Debt ratio Coverage ratios, such as interest coverage ratio or EBITDA coverage ratio Current ratios (More )
7 Provisions in the bond contract Secured versus unsecured debt Senior versus subordinated debt Guarantee provisions Sinking fund provisions Debt maturity Other factors Earnings stability Regulatory environment Potential product liability Accounting policies (More ) 5-39 What is the term structure of interest rates? What is a yield curve? Term structure: the relationship between interest rates (or yields) and maturities A graph of the term structure is called the yield curve 5-40 How can you construct a hypothetical Treasury yield curve? Estimate the inflation premium (IP) for each future year This is the estimated average inflation over that time period Step 2: Estimate the maturity risk premium (MRP) for each future year 5-41 Assume investors expect inflation to be 5% next year, 6% the following year, and 8% per year thereafter Step 1: Find the average expected inflation rate over years 1 to n: n Σ INFL t t 1 IP n n IP 1 5%/10 500% IP 10 [ (8)]/10 75% IP 20 [ (18)]/20 775% Must earn these IPs to break even versus inflation; that is, these IPs would permit you to earn r* (before taxes) 5-42
8 5-43 Assume the MRP is zero for Year 1 and increases by 01% each year Step 2: Find MRP based on this equation: MRP t 01%(t - 1) MRP 1 01% x 0 00% MRP 10 01% x 9 09% MRP 20 01% x 19 19% 5-44 Step 3: Add the IPs and MRPs to r*: r RFt r* + IP t + MRP t r RF Quoted market interest rate on treasury securities Assume r* 3%: r RF1 3% + 5% + 00% 80% r RF10 3% + 75% + 09% 114% r RF20 3% + 775% + 19% 1265% Hypothetical Treasury Yield Curve Interest Rate (%) 1 yr 80% 15 Maturity risk premium 10 yr 114% 20 yr 1265% Inflation premium Real risk-free rate Years to Maturity 5-46 What factors can explain the shape of this yield curve? This constructed yield curve is upward sloping This is due to increasing expected inflation and an increasing maturity risk premium 5-47 What kind of relationship exists between the Treasury yield curve and the yield curves for corporate issues? Corporate yield curves are higher than that of the Treasury bond However, corporate yield curves are not necessarily parallel to the Treasury curve The spread between a corporate yield curve and the Treasury curve widens as the corporate bond rating decreases Interest Rate (%) Hypothetical Treasury and Corporate Yield Curves 52% 59% 5-48 BB-Rated AAA-Rated 60% Treasury yield curve Years to 0 maturity
CHAPTER 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 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 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 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 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 informationChapter 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 informationValuing Bonds. Professor: Burcu Esmer
Valuing Bonds Professor: Burcu Esmer 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
More informationCHAPTER 5 THE COST OF MONEY (INTEREST RATES)
CHAPTER 5 THE COST OF MONEY (INTEREST RATES) 1 Learning Outcomes LO.1 Describe the cost of money and factors that affect the cost of money. LO.2 Describe how interest rates are determined. LO.3 Describe
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 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. 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 informationNanyang Business School. Financial Management. Nilanjan Sen, Ph.D., CFA
Nanyang Business School Financial Management Nilanjan Sen, Ph.D., CFA Associate Dean, Nanyang Executive Education Director, English Executive MBA Program Director, Nanyang Fellows Program Nanyang Business
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 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 informationBH Chapter 4 The Financial Environment: Markets, Institutions,& Interest Rates 1
Topics Financial markets Types of financial institutions Determinants of interest rates Yield curves BH Chapter 4 The Financial Environment: Markets, Institutions,& Interest Rates 1 2 Different Financial
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 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 informationThe following pages explain some commonly used bond terminology, and provide information on how bond returns are generated.
1 2 3 Corporate bonds play an important role in a diversified portfolio. The opportunity to receive regular income streams from corporate bonds can be appealing to investors, and the focus on capital preservation
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 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 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 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 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 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 informationCREDIT RATINGS. Rating Agencies: Moody s and S&P Creditworthiness of corporate bonds
CREDIT RISK CREDIT RATINGS Rating Agencies: Moody s and S&P Creditworthiness of corporate bonds In the S&P rating system, AAA is the best rating. After that comes AA, A, BBB, BB, B, and CCC The corresponding
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 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 informationInterest Rates & Bond Portfolio Management
Interest Rates & Bond Portfolio Management I. Background & Motivation. A. Bond Portfolio managers are interest rate timers. 1. If you expect rates to decline, buy bonds. 2. If you expect rates to rise,
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 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 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 informationINTEREST RATES AND BOND VALUATION
CHAPTER 6 INTEREST RATES AND BOND VALUATION L E A R N I N G G O A L S LG1 LG2 LG3 Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Review the legal aspects
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 informationSwaps 7.1 MECHANICS OF INTEREST RATE SWAPS LIBOR
7C H A P T E R Swaps The first swap contracts were negotiated in the early 1980s. Since then the market has seen phenomenal growth. Swaps now occupy a position of central importance in derivatives markets.
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 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 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 informationBasic Finance Exam #2
Basic Finance Exam #2 Chapter 10: Capital Budget list of planned investment project Sensitivity Analysis analysis of the effects on project profitability of changes in sales, costs and so on Fixed Cost
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 informationDEBT MANAGEMENT EXAMINATION
1. Duration: a) is a measure of volatility of bond returns. b) is influenced by the coupon rate and yield to maturity. c) provides an approximation of the percentage price change in a bond due to a change
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 informationFINA Homework 2
FINA3313-005 Homework 2 Chapter 04 Measuring Corporate Performance True / False Questions 1. The higher the times interest earned ratio, the higher the interest expense. 2. The asset turnover ratio and
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 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 informationLecture #1. Introduction Debt & Fixed Income. BONDS LOANS (Corporate) Chapter 1
Lecture #1 Introduction Debt & Fixed Income BONDS LOANS (Corporate) Chapter 1 Fed, State, Local BONDS: Six sectors: U.S. Treasury Sector o Issued by U.S. Government o T-Bills, Notes, Bonds o The largest
More informationTREASURY AND INVESTMENT MANAGEMENT EXAMINATION
1. Duration: a) is a weighted average maturity of the present value of cash flows for a security. b) is influenced by the coupon rate and yield to maturity. c) provides an approximation of the percentage
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 informationInvestments 4: Bond Basics
Personal Finance: Another Perspective Investments 4: Bond Basics Updated 2017/06/28 1 Objectives A. Understand risk and return for bonds B. Understand bond terminology C. Understand the major types of
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 informationMIDTERM EXAMINATION FALL
MIDTERM EXAMINATION FALL 2010 MGT411-Money & Banking By VIRTUALIANS.PK SOLVED MCQ s FILE:- Question # 1 Wider the range of outcome wider will be the. Risk Profit Probability Lose Question # 2 Prepared
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 informationAnswers to Chapter 2 Questions:
Answers to Chapter 2 Questions: 1. The household sector (consumers) is the largest supplier of loanable funds. Households supply funds when they have excess income or want to reinvest a part of their wealth.
More informationCHAPTER 17: MORTGAGE BASICS (Ch.17, sects.17.1 & 17.2 only)
CHAPTER 17: MORTGAGE BASICS (Ch.17, sects.17.1 & 17.2 only) The Four Rules of Loan Payment & Balance Computation... Rule 1: The interest owed in each payment equals the applicable interest rate times the
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 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 informationFIN 6160 Investment Theory. Lecture 9-11 Managing Bond Portfolios
FIN 6160 Investment Theory Lecture 9-11 Managing Bond Portfolios Bonds Characteristics Bonds represent long term debt securities that are issued by government agencies or corporations. The issuer of bond
More informationING MVA ANNUITY A Single Premium Deferred Annuity (Standard Form # Nonqualified; may vary by state and not available in all states.
An Annuity Illustration using ING MVA ANNUITY (Standard Form #03502 8-00 Nonqualified; may vary by state and not available in all states.) Designed for: Mr. Wise Presented by: Financial Professional..,
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 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 informationRunning head: THE TIME VALUE OF MONEY 1. The Time Value of Money. Ma. Cesarlita G. Josol. MBA - Acquisition. Strayer University
Running head: THE TIME VALUE OF MONEY 1 The Time Value of Money Ma. Cesarlita G. Josol MBA - Acquisition Strayer University FIN 534 THE TIME VALUE OF MONEY 2 Abstract The paper presents computations about
More informationFinance II (Dirección Financiera II) Apuntes del Material Docente. Szabolcs István Blazsek-Ayala
Finance II (Dirección Financiera II) Apuntes del Material Docente Szabolcs István Blazsek-Ayala Table of contents Fixed-income securities 1 Derivatives 27 A note on traditional return and log return 78
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 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 informationFixed Income Update: Structuring Portfolios for a Rising Interest Rate Environment
Fixed Income Update: Structuring Portfolios for a Rising Interest Rate Environment February 16, 2017 Thomas S. Sawyer Sawyer Falduto Asset Management, LLC 630-941-8560 tsawyer@sawyerfalduto.com Introduction
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 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 information