1 1 ch14 – mba 566 bond price, yields, and returns different bond types bond price bond yield bond...
TRANSCRIPT
11Ch14 – MBA 566
Bond Price, Yields, and Returns
Different Bond Types
Bond Price
Bond Yield
Bond Returns
Bond Risk Structure
22Ch14 – MBA 566
Face or par valueCoupon rate
Zero coupon bond
Compounding and paymentsAccrued Interest
Indenture
Bond Characteristics
33Ch14 – MBA 566
Accrued Interest
periodcouponinDays
periodAIinDayscoupondollarannualAI
___
___
2
__
Example on page 447
44Ch14 – MBA 566
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
66Ch14 – MBA 566
Secured or unsecured
Call provision
Convertible provision
Put provision (putable bonds)
Floating rate bonds
Sinking funds
Provisions of Bonds
77Ch14 – MBA 566
Principal and Interest Payments for TIPS
The above is index bond.
See pages 451-452.
Compute real returns in year 1, 2, 3
88Ch14 – MBA 566
)1()1(1 rParValue
rCP T
T
T
tt
tB
PB = Price of the bond
Ct = interest or coupon payments
T = number of periods to maturity
y = semi-annual discount rate or the semi-annual yield to maturity
Bond Pricing
Accrued interest: page 459
99Ch14 – MBA 566
Ct = 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
1010Ch14 – MBA 566
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
1212Ch14 – MBA 566
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 rParValue
rCP T
T
T
tt
tB
1313Ch14 – MBA 566
Yield Measures
Bond Equivalent Yield
7.72% = 3.86% x 2
Effective Annual Yield
(1.0386)2 - 1 = 7.88%
1616Ch14 – MBA 566
Holding Period Return versus YTM
Reinvestment Assumptions
Holding Period ReturnChanges in rates affects returns
Reinvestment of coupon payments
Change in price of the bond
1919Ch14 – MBA 566
Holding-Period Return: Single Period
HPR = [ I + ( P0 - P1 )] / P0
where
I = interest payment
P1 = price in one period
P0 = purchase price
2020Ch14 – MBA 566
Example
CR = 8%
YTM = 10%
N=10 years
Semiannual Compounding
What is HPR when the rate falls to 7% in six months?
2121Ch14 – MBA 566
Zero-coupon Bonds and Treasury Strips
Zero coupon bonds – page 465Short term treasuries
Long term zero coupons
Treasury may strip payments from treasury coupon bonds -- STRIPS
2222Ch14 – MBA 566
The Price of a 30-Year Zero-Coupon Bond over Time at a Yield to Maturity of 10%
After-tax return – see page 478.
2323Ch14 – MBA 566
Rating companies (P 467)Moody’s Investor Service
Standard & Poor’s
Fitch
Rating CategoriesInvestment grade
Speculative grade
Page 468
Default Risk and Ratings
2424Ch14 – MBA 566
Coverage ratios
Leverage ratios
Liquidity ratios
Profitability ratios
Cash flow to debt
Factors Used by Rating Companies
2525Ch14 – MBA 566
Sinking funds
Subordination of future debt
Dividend restrictions
Collateral
Protection Against Default