Professional Documents
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Chapter 6
Principles of Investing
Investing in Financial
Assets
Investing in Stocks
Investing in Bond
Investment Strategies
Investment Basics
S.V. Atre 1
ENGR 390 Lecture 10 Bonds Winter 2007
Investing in Bond
Types of Bonds and How They Are Issued in the Financial Market
S.V. Atre 2
ENGR 390 Lecture 10 Bonds Winter 2007
No meaning,
Spacing Maturity date
Coupon rate
2005
AT&T 7s05
Closing price: 108 1/ 4
$1,082.50
Market price
S.V. Atre 3
ENGR 390 Lecture 10 Bonds Winter 2007
Bond Quotes
$70/108.25 $1,082.50
= 6.47%
S.V. Atre 4
ENGR 390 Lecture 10 Bonds Winter 2007
BOND TERMINOLOGY
1. Face Value, Par Value, Maturity Value
– How much the borrower will pay the
holder when it matures.
2. Coupon Rate, Nominal Annual Interest Rate
– Paid yearly on face value.
3. Frequency of Interest Payments
4. Maturity Date
– Date at which you receive the face value
5. Current Price, Market Value
– What someone is willing to pay for the
future cash flows.
6. Yield to Maturity
– Actual interest earned over holding period
Problem 1
You desire to make an investment in
bonds provided you can earn 12% per
year, compounded monthly on your
investment.
S.V. Atre 5
ENGR 390 Lecture 10 Bonds Winter 2007
Problem 1
GIVEN:
FACE VALUE = $10,000
COUPON RATE = 10% (APR) PAID QUARTERLY
MATURITY = 20 YEARS
DESIRED YIELD RATE = 12%/YR, CPD MONTHLY
DIAGRAM: $10,000
AB
0
1 2 3 4 80 QUARTERS
P?
Problem 1
DIAGRAM: $10,000
AB
0
1 2 3 4 80 QUARTERS
P?
S.V. Atre 6
ENGR 390 Lecture 10 Bonds Winter 2007
Problem 1
DIAGRAM: $10,000
$250
0
1 2 3 4 80 QUARTERS
P?
3. How much is ieff for your expectation?
C = 3; K = 4; r = 0.12
C
⎛ r ⎞
i = ⎜1 + ⎟ −1
⎝ CK ⎠
3
⎛ 0.12 ⎞
= ⎜⎜1 + ⎟⎟ − 1
⎝ (3)4 ⎠
= 3.0301% PER QUARTER
Problem 1
DIAGRAM: $10,000
$250
0
1 2 3 4 80 QUARTERS
P?
S.V. Atre 7
ENGR 390 Lecture 10 Bonds Winter 2007
Problem 2
A $1000 face value bond will mature
in 10 years. The annual rate of
interest is 6% payable semi-annually.
Problem 2
GIVEN:
FACE VALUE = $1,000
COUPON RATE = 6% (APR) PAID SEMI-ANNUALLY
MATURITY = 10 YEARS
MARKET PRICE = $870
DIAGRAM: $1,000
AB
0
1 2 3 4 20 PERIODS
$870
ia = ?
S.V. Atre 8
ENGR 390 Lecture 10 Bonds Winter 2007
DIAGRAM:
Problem 2 $1,000
AB
0
1 2 3 4 20 PERIODS
$870
ia = ?
1. How much is semi-annual interest rate, iB currently ?
C = 1; K = 2; r = 0.06
C
⎛ r ⎞
i = ⎜1 + ⎟ −1
⎝ CK ⎠ AB = $1,000 (0.03)
⎛ 0.06 ⎞
1 = $30 SEMI-ANNUALLY
= ⎜⎜1 + ⎟ −1
⎝ (1)2 ⎟⎠
= 3% SEMI − ANNUALLY
DIAGRAM:
Problem 2 $1,000
$30
0
1 2 3 4 20 PERIODS
$870
ia= ?
S.V. Atre 9
ENGR 390 Lecture 10 Bonds Winter 2007
Problem 2
DIAGRAM: $1,000
$30
0
1 2 3 4 20 PERIODS
$870
ia = ?
iA = [1 + 0 .0396 ]2 − 1
= 8 .08 % / YEAR
Yield
S.V. Atre 10
ENGR 390 Lecture 10 Bonds Winter 2007
Investment Strategies
S.V. Atre 11
ENGR 390 Lecture 10 Bonds Winter 2007
Summary
The three basic investment objects are: growth,
income, and liquidity.
The two greatest risks investors face are
inflation and market volatility.
Diversification by combining assets with
different patterns of return, it is possible to
achieve a higher rate of return without
increasing significant risk.
Investing in stocks and bonds is one of the
most common investment activities among the
American investors.
S.V. Atre 12