LUBS1035Foundations of Finance2012/13

John SmithLecture 4: Bond Valuation

Leeds University Business School

Overview of Lecture

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Accounting & Finance FilmSoc

The first film of the year to be screened is:Rogue TraderWith introduction from John Smithand FREE popcorn!

Wednesday 24th October 2012 at 6pmYorkshire Bank Lecture Theatre

Definition of a Bond

Bonds and Bond Valuation

Bonds and Bond Valuation

Bond Values and Yields

Bond Values and Yields

Bond Valuation

Bond Values and YieldsPixie plc examplePV of Face Value:Present value = 1,000/1.0810 = 1,000/2.1589 = 463.19PV of Annuity: Annuity present value = 80 (1 1/1.0810)/.08= 80 (1 1/2.1589)/.08 = 80 6.7101 = 536.81

Bond Value:PV of Face Value + PV of Annuity = 463.19 + 536.81 = 1,000

Bond Values and Yields

Bond Values and Yields

Bond Value FormulaIf a bond has (1) a face value of F paid at maturity, (2) a coupon of C paid per period, (3) t periods to maturity, and (4) a yield of r per period, its value is:

Example 6.1Semi-Annual Coupons

Example 6.1Semi-Annual Coupons

Interest Rate Risk

Interest Rate Risk

Example 6.2Current Events

Example 6.2Current Events

Example 6.2Current Events

Example 6.3Bond Yields

Bond Yields

More about Bond FeaturesExample 6.2 ICO Bond

Bond Features

Terms of a Bond

Bond Ratings

Different Types of Bond

Bond Markets

Inflation and Nominal Rates

The Fisher Effect

Example 6.4The Fisher Effect

Example 6.4The Fisher EffectFrom the Fisher effect, we have:

Therefore, the nominal rate will actually be closer to 19 per cent.

The Term Structure of Interest Rates

Terminology

The Term Structure of Interest Rates

The Term Structure of Interest Rates

Bond Yields and the Yield Curve

Activities for this Lecture

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