McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.. reading the financial pagesInterest Rates and Bond Prices Current Yield and Yield to Maturity Bond Rates and R
Trang 1McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights
reserved
Valuing Bonds
Trang 2 reading the financial pages
Interest Rates and Bond Prices
Current Yield and Yield to Maturity
Bond Rates and Returns
The Yield Curve
Corporate Bonds and the Risk of Default
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reserved
McGraw-Hill/Irwin
Bonds
Terminology
Bond - Security that obligates the issuer to make
specified payments to the bondholder.
Coupon - The interest payments made to the
bondholder.
Face Value (Par Value or Principal Value) - Payment at the maturity of the bond.
Coupon Rate - Annual interest payment, as a
percentage of face value.
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r
cpn r
Trang 6056 ,
1
$
) 035
1 (
055 ,
1 )
035
1 (
55 )
035
1 (
55
3 2
1
=
+ +
=
PV PV
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reserved
McGraw-Hill/Irwin
Bond Cash Flows
Trang 8Example (continued)
What is the price of the bond if the required rate
of return is 5.5 %?
000 ,
1
$
) 055
1 (
055 ,
1 )
055
1 (
55 )
055
1 (
55
3 2
1
=
+ +
=
PV PV
Trang 9Copyright © 2007 by The McGraw-Hill Companies, Inc All rights
783
$
) 15
1 (
055 ,
1 )
15
1 (
55 )
15
1 (
55
3 2
1
=
+ +
=
PV PV
Trang 10Example (continued)
What is the price of the bond if the required rate
of return is 3.5% AND the coupons are paid semi-annually?
49 056 ,
1
$
) 0175
1 (
50 027 ,
1 )
0175
1 (
50
27
) 0175
1 (
50
27 )
0175
1 (
50
27
6 5
2 1
=
+ +
+ +
=
PV
PV
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reserved
McGraw-Hill/Irwin
Bond Pricing
Example (continued)
Q: How did the calculation change, given
semi-annual coupons versus semi-annual coupon payments?
Trang 12Example (continued)
Q: How did the calculation change, given
semi-annual coupons versus semi-annual coupon payments?
Time Periods
Paying coupons twice a year, instead of once doubles the total number of
Discount Rate
Since the time periods are
now half years, the discount rate is also
Trang 13Copyright © 2007 by The McGraw-Hill Companies, Inc All rights
Yield To Maturity - Interest rate for which the
present value of the bond’s payments equal the price.
Trang 14Calculating Yield to Maturity (YTM=r)
If you are given the price of a bond (PV) and the coupon rate, the yield to maturity can be found by solving for r.
PV cpn
r
cpn r
( ) ( )
( )
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056 ,
1
$
) 1
(
055 ,
1 )
1 (
55 )
1 (
55
3 2
1
=
+
+ +
+ +
=
PV
r r
r PV
Trang 16Calculating YTM by hand can be very tedious
It is highly recommended that you learn to use the
“IRR” or “YTM” or “i” functions on a financial calculator
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investment
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McGraw-Hill/Irwin
Bond Yield Spreadsheet
Esc and Double click on spreadsheet to access
Trang 209209409609801,0001,0201,0401,060
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reserved
McGraw-Hill/Irwin
Interest Rate Risk
5001,0001,5002,0002,5003,000
Trang 22Yield on UK nominal bonds Yield on UK
indexed bonds
Trang 23Copyright © 2007 by The McGraw-Hill Companies, Inc All rights
Trang 24Aaa AAA The strongest rating; ability to repay interest and principal
sustained periods is questionable.
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Trang 26Term Structure of Interest Rates - A listing of bond maturity dates and the interest rates that
correspond with each date.
Yield Curve - Graph of the term structure.