# Chapter 3 - How Securities are Traded by 08c5mV

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```									Bond Prices and Yields – Chapter 14
Chapter Concepts
   Bond Characteristics

   Bond Pricing and Yields

   Risk of Default
Bond Features
   Face Value or Par Value
 Amount the issuer repays at maturity

   Coupon Rate
 Rate of interest the bond pays based on the face value

 Coupon rate times face value = coupon payment

 Coupon payments are typically made every 6 months

 Note bond prices quoted are typically quoted without accrued

interest, the actual purchase price will include accrued interest

   Bond indenture
 The contract or agreement between the buyer and the issuer of

the bond
Types pf Bonds
   Treasury Bills, Notes and Bonds

   Corporate Bonds

   Municipal Bonds

   International Bonds (govt. and corp.)

   Innovative Bonds
 Not a focus of this class and sections in chapter 14 on these

can be skipped
Features
   Secured or Unsecured

   Call provision
 Review yield to call vs. yield to maturity

   Convertible provision

   Put provision

   Floating rate bonds

   Sinking funds
Bond Pricing
   Primarily intend to use your financial calculator, but you must
understand the formulas
  Many of the formulas would take significant time to calculate out

   T = Final period
   t = each individual period
   r = Bond equivalent yield

T
Coupon                    ParValue
PB =     (1  r )t                 
(1  r )     T
t 1
Prices and Coupon Rates

Price

Yield
Yield Measures

   Bond Equivalent Yield
 7.72% (3.865% x 2)

   Effective Annual Yield
2
 (1.0386) = 7.88%

   Current Yield
 Annual interest / Market Price

 \$70/\$950 = 7.37%
Realized Yield vs. Yield to Maturity
   Reinvestment Assumptions

   Holding Period Return
 Changes in rates affects returns

 Reinvestment of coupon payments

 Change in price of the bond

HPR  [I  (P 0P )] / P0
1

   I – interest payment
   P1 = Price in one period
   P0 = Purchase Price
Holding Period Example
CR = 8%
YTM = 8%
N = 10
Semiannual Compounding
Face Value \$1000

In 6 months the rate fell to 7%

P1 = \$1068.55

HPR = [40+ (1068.55-1000)]/1000

10.85% semiannually
Default Risk
   Rating Agencies
 Why are they there

 How do they work

 S&P, Moody’s, Duff & Phelps, Fitch

   Investment Grade vs. High Yield