CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding...
-
date post
22-Dec-2015 -
Category
Documents
-
view
230 -
download
2
Transcript of CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding...
![Page 1: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/1.jpg)
CHAPTER 14
Bond Prices and Yields
![Page 2: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/2.jpg)
• Face or par value• Coupon rate– Zero coupon bond
• Compounding and payments– Accrued Interest
• Indenture
Bond Characteristics
![Page 3: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/3.jpg)
Different Issuers of Bonds
• U.S. Treasury– Notes and Bonds
• Corporations• Municipalities• International Governments and Corporations• Innovative Bonds– Floaters and Inverse Floaters– Asset-Backed– Catastrophe
![Page 4: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/4.jpg)
1 (1 )(1 )
T
TB tt
ParValueCPrr
PB = Price of the bond
C = interest or coupon paymentsT = number of periods to maturityr = semi-annual discount rate or the semi-annual yield to maturity
Bond Pricing
![Page 5: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/5.jpg)
C = 40 (SA)P = 1000T = 20 periodsr = 3% (SA)
Price: 10-yr, 8% Coupon, Face = $1,000
77.148,1$
)03.1(
1000
03.1
140
20
20
1
P
Pt
t
![Page 6: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/6.jpg)
• Prices and Yields (required rates of return) have an inverse relationship
• When yields get very high the value of the bond will be very low
• When yields approach zero, the value of the bond approaches the sum of the cash flows
Bond Prices and Yields
![Page 7: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/7.jpg)
Figure 14.3 The Inverse Relationship Between Bond Prices and Yields
![Page 8: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/8.jpg)
Table 14.2 Bond Prices at Different Interest Rates (8% Coupon Bond, Coupons Paid Semiannually)
![Page 9: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/9.jpg)
Yield to Maturity
• Interest rate that makes the present value of the bond’s payments equal to its price
Solve the bond formula for r
1 (1 )(1 )
T
Ttt
BParValueCP
rr
![Page 10: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/10.jpg)
Yield to Maturity Example
)1(1000
)1(35950
20
1 rrT
tt
10 yr Maturity Coupon Rate = 7%
Price = $950
Solve for r = semiannual rate r = 3.8635%
![Page 11: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/11.jpg)
Yield Measures
Bond Equivalent Yield7.72% = 3.86% x 2
Effective Annual Yield(1.0386)2 - 1 = 7.88%
Current YieldAnnual Interest / Market Price$70 / $950 = 7.37 %
Yield to Call
![Page 12: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/12.jpg)
Figure 14.4 Bond Prices: Callable and Straight Debt
![Page 13: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/13.jpg)
Realized Yield versus YTM
• Reinvestment Assumptions• Holding Period Return– Changes in rates affect returns– Reinvestment of coupon payments– Change in price of the bond
![Page 14: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/14.jpg)
Figure 14.5 Growth of Invested Funds
![Page 15: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/15.jpg)
Figure 14.6 Prices over Time of 30-Year Maturity, 6.5% Coupon Bonds
![Page 16: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/16.jpg)
Holding-Period Return: Single Period
HPR = [ I + ( P0 - P1 )] / P0
whereI = interest paymentP1 = price in one period
P0 = purchase price
![Page 17: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/17.jpg)
Holding-Period Return Example
CR = 8% YTM = 8% N=10 yearsSemiannual Compounding P0 = $1000
In six months the rate falls to 7%P1 = $1068.55
HPR = [40 + ( 1068.55 - 1000)] / 1000 HPR = 10.85% (semiannual)
![Page 18: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/18.jpg)
Figure 14.7 The Price of a 30-Year Zero-Coupon Bond over Time at a Yield to
Maturity of 10%
![Page 19: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/19.jpg)
• Rating companies– Moody’s Investor Service– Standard & Poor’s– Fitch
• Rating Categories– Investment grade– Speculative grade/Junk Bonds
Default Risk and Ratings
![Page 20: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/20.jpg)
Figure 14.8 Definitions of Each Bond Rating Class
![Page 21: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/21.jpg)
• Coverage ratios• Leverage ratios• Liquidity ratios• Profitability ratios• Cash flow to debt
Factors Used by Rating Companies
![Page 22: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/22.jpg)
Default Risk and Yield
• Risk structure of interest rates• Default premiums– Yields compared to ratings– Yield spreads over business cycles
![Page 23: CHAPTER 14 Bond Prices and Yields. Face or par value Coupon rate – Zero coupon bond Compounding and payments – Accrued Interest Indenture Bond Characteristics.](https://reader035.fdocuments.us/reader035/viewer/2022062304/56649d795503460f94a5c846/html5/thumbnails/23.jpg)
Figure 14.11 Yields on Long-Term Bonds, 1954 – 2006