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

   Risk Premiums and Risk Spreads

								
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