Professional Documents
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Characteristics of Bonds
Principles Used
BOND VALUATION
BOND CHARACTERISTICS
Par Value
Coupon Rate
Maturity Date
Call Provision
Convertible Bonds
Income Bonds.
Indexed bond
BOND CHARACTERISTICS
Par Value:
Maturity Date:
BOND CHARACTERISTICS
Coupon Rate:
Interest Payment:
= Coupon rate X Par Value
BOND CHARACTERISTICS
BOND CHARACTERISTICS
Convertible Bonds:
Income Bonds:
Indexed bond:
TYPES OF BONDS
US Government Bonds
Municipal Bonds
Corporate Bonds
EuroBonds
Junk Bonds
Treasury Bills
Treasury Notes
Treasury Bonds
Treasury Strips
Zero-coupon bond
Created by stripping the coupons and
principal from Treasury bonds and notes.
CORPORATE BONDS
Eurobonds
BOND RATINGS
Bond Ratings
Moodys
S&P
Quality of Issue
Aaa
AAA
Aa
AA
Baa
BBB
Ba
BB
Caa
CCC
Ca
CC
In default.
Bond Valuation
BOND VALUATION
VB = Present Value of the Interest
Payments plus the Present Value of
the Maturity Value (Par Value).
BOND VALUATION
BOND
VALUE
Interest
Paymen
t ($)
Interest Rate
Par
Value
Numb
er of
Period
s
BOND VALUATI0N
BOND VALUATION
Present Value of the Interest Payments
Interest
Paymen
t $100
10% ~ .10
Bond Valuation
Present Value of the Interest Payments
0 r=10%
$100
$91
$83
$75
$249
$100
$100
100
100
(1 + .
10)1
100
(1 + .
10)2
(1 + .
10)3
Bond Valuation
Present Value of the Maturity Value
$1,000
3 yrs
10% ~ .10
Bond Valuation
Present Value of the Maturity Value
0 r=10%
3
$1,000
$1,000
(1 + .
10)3
$751
Bond Valuation
Present Value of the Interest Payments plus the Present Value of the Maturit
$100
$91
$83
$100
$100
$1,000
100
100
$1,000
(1 + .
10)1
100
(1 + .
10)2
(1 + .
10)3
(1 + .
10)3
$75
$249
$751
$1,000 = Vb
Review Questions
TAKE TEN
MINUTES
BOND VALUATI0N
Bond Valuation
Present Value of the Interest Payments plus the Present Value of the Maturit
$100
$95
$91
$100
$100
$1,000
100
100
$1,000
(1 + .
05)1
100
(1 + .
05)2
(1 + .
05)3
(1 + .
05)3
$86
$272
$864
$1,136 = Vb
BOND VALUATI0N
Bond Valuation
Present Value of the Interest Payments plus the Present Value of the Maturit
$45
$41
$50
$50
$50
$1,000
50
50
$1,000
(1 + .
10)1
50
(1 + .
10)2
(1 + .
10)3
(1 + .
10)3
$38
$124
$751
$876 = Vb
BOND VALUATION
Interest rates change over time, so a
bonds value will fluctuate over
time.
SEMI-ANNUAL COUPONS
BOND VALUATI0N
BOND VALUATION
nper = 6
rate = .05
Pmt = 50
FV = 1,000
PV = ???
BOND VALUATION
nper = 6
rate = .05
Pmt = 50
FV = 1,000
PV = 1,000
Coupo
n rate
Yield to
maturity
Years to
maturity
8%
10%
4%
6%
1.5
6%
4%
6.25%
6%
4%
8%
2.5
Bond
value
BOND YIELDS
Yield to maturity the yield you will
receive if you hold the bond until it
matures.
YIELD TO MATURITY
Lets use the same example: we issue a
bond with a 10% coupon. The price is
$1,000 (the par value). What is the yield
to maturity?
nper = 30, Pmt = 100, FV = 1,000, PV =
-1,000
The FV and Pmt are amounts we will
receive; the PV is an amount we pay so
it is a minus.
YIELD TO MATURITY
Lets use the same example: we issue a bond
with a 10% coupon. The price is $1,000 (the
par value). What is the yield to maturity?
nper = 30, Pmt = 100, FV = 1,000, PV = -1,000
rate = 10%
The same as the Coupon rate; if FV and PV
are equal the interest rate will equal the
coupon rate.
YIELD TO MATURITY
Now lets assume that 5 years go by
and we pay $1,225.08 for our
bond. What is the yield to
maturity?
nper = 25, Pmt = 100, FV = 1,000,
PV = -1,225.08
YIELD TO MATURITY
Now lets assume that 5 years go by
and we pay $1,225.08 for our bond.
What is the yield to maturity?
nper = 25, Pmt = 100, FV = 1,000,
PV = -1,225.08
rate = 7.91
Review Questions
In your groups calculate the YTM
YIELD TO CALL
YIELD TO CALL
YIELD TO CALL
nper = 5 (years until bond can be
called)
Pmt = 100
FV = 1,000
PV = -1,225.08
Rate = ????
YIELD TO CALL
nper = 5 (years until bond can be
called)
Pmt = 100
FV = 1,000
PV = -1,225.08
Rate = 4.83
CURRENT YIELD
The ratio of the interest payment to
the bonds current market price.
In our example:
Current Yield = 100/1,225.08 =
8.16%
Review Questions
In your groups calculate the following: