Professional Documents
Culture Documents
What is a bond?
7-2
Bond Valuation
7-3
Bond Terminology
Bond Terminology
7-5
Bond ValuationBasic
Ideas
k
Value
...
CF1
CF2
CFn
CF1
CF2
CFn
Value
...
1
2
n
(1 k)
(1 k)
(1 k)
7-8
k
VB = ?
...
100
100
100 + 1,000
$100
$100
$1,000
VB
...
1
10
(1.10)
(1.10)
(1.10)10
VB $90.91 ... $38.55 $385.54
VB $1,000
7-9
FV[PVFk,n]
7-10
This is an
ordinary
annuity.
This is a
single
sum.
7-11
Value of a Bond
7-12
Coupon rate
[Table II]
= $754.16 + $57.00
= $811.16.
$811.16
7-14
V=
MV
(1 + kd)n
= MV (PVIFk
d, n
7-15
Semi-annual Compounding
Most bonds pay interest twice a
year (1/2 of the annual coupon).
Adjustments needed:
(1) Divide kd by 2
(2) Multiply n by 2
(3) Divide I by 2
7-16
Semi-annual Compounding
A non-zero coupon bond adjusted for
semiannual compounding.
I
/
2
I
/
2
I
/
2
+
MV
V =(1 + k /2 )1 +(1 + k /2 )2 + ... +
2 n
d
2*n
t=1
I/2
(1 + kd /2 )
= I/2 (PVIFAk
(1 + kd/2 ) *
MV
(1 + kd /2 ) 2*n
) + MV (PVIFkd /2 , 2*n)
/2 ,2*n
7-17
Semi-annual Compounding
Bond C has a $1,000 face value and provides an
8% semiannual coupon for 15 years. The
appropriate market rate is 10% (annual rate). What
is the value of the coupon bond?
7-18
Bond Price-Yield
relationship
Discount Bond -- The market required rate of return
exceeds the coupon rate (Par > P0 ).
Premium Bond -- The coupon rate exceeds the
market required rate of return (P0 > Par).
Par Bond -- The coupon rate equals the market
required rate of return (P0 = Par).
If interest rate rise so that market required rate of
return increases, the bonds price will fall.
If interest rate fall, so that market required rate of
return decreases, the bonds price will rise.
7-19
VB
1,372
1,211
kd = 7%.
kd = 10%.
1,000
837
775
kd = 13%.
30
25
20
15
10
Years
to Maturity
7-20
Definitions
Annual coupon payment
Current yi
eld(CY)
Currentprice
Changein price
Capitalgainsyield(CGY)
Beginningprice
Expected
Expected
Expectedtotalreturn YTM
CY CGY
7-22
An example:
Current and capital gains yield
= $90 / $887
= 0.1015 = 10.15%
7-23
Call Provisions
Call provision
Call Provisions
Call Provisions
Yield to Call
7-30
7-31
Long-term
AND/OR Low
coupon bonds
Interest
rate risk
Low
High
Reinvestme
nt rate risk
High
Low
7-32
Default Risk
Bond Refunding
7-34
Bond Indentures
Controlling Default Risk
Sinking Fund
7-37
Bond Indenture
Standard provision
Bond Indenture
Restrictive provisions
Bond Indenture
Security Interest
Trustee
Types of bonds
Unsecured bonds
Secured bonds
41
Debentures
Subordinated debentures
Income bonds
Mortgage bonds
Collateral trust bonds
Equipment trust certificate
7-41
Debentures
42
Types of bonds
Subordinated debentures
Income bonds
Types of bonds
Mortgage bonds
Types of bonds
45
7-45
Contemporary types of
bonds
Junk bonds
High risk bonds high yields often yielding 2% to
3% more than the best quality corporate debt.
7-46
Contemporary types of
bonds
Contemporary types of
bonds
Extendible notes
Contemporary types of
bonds
Putable bonds