lecture4(ch4)

1、,,,,,,,,,,,,,Irwin/McGraw-Hill,,,,,Chapter 4,Fundamentals of Corporate FinanceThird Edition,Valuing Bonds,,Brealey Myers Marcusslides by Matthew Will,Irwin/McGraw-Hill,The McGraw-Hill Companies, Inc.,2001,,,,,,,,,

2、,,,,,Irwin/McGraw-Hill,Topics Covered,Bond Characteristicsreading the financial pagesBond Prices and YieldsBond prices and interest ratesYTM vs. current yieldRate of ReturnInterest Rate RiskThe Yield CurveNominal

3、 and Real Rates of InterestDefault Risk,,,Bonds,TerminologyBond - Security that obligates the issuer to make specified payments to the bondholder.Coupon - The interest payments made to the bondholder.Face Value (Par

4、Value or Maturity Value) - Payment at the maturity of the bond.Coupon Rate - Annual interest payment, as a percentage of face value.,,,Bonds,WARNINGThe coupon rate IS NOT the discount rate used in the Present Value ca

5、lculations. The coupon rate merely tells us what cash flow the bond will produce. Since the coupon rate is listed as a %, this misconception is quite common.,,,Bond Pricing,The price of a bond is the Present Value

6、of all cash flows generated by the bond (i.e. coupons and face value) discounted at the required rate of return.,,,,Bond Pricing,ExampleWhat is the price of a 6 % annual coupon bond, with a $1,000 face value, which mat

7、ures in 3 years? Assume a required return of 5.6%.,,,Bond Pricing,Example (continued)What is the price of the bond if the required rate of return is 6 %?,,,Bond Pricing,Example (continued)What is the price of the bo

8、nd if the required rate of return is 15 %?,,,Bond Pricing,Example (continued)What is the price of the bond if the required rate of return is 5.6% AND the coupons are paid semi-annually?,,,Bond Pricing,Example (continue

9、d)Q: How did the calculation change, given semi-annual coupons versus annual coupon payments?,Time PeriodsPaying coupons twice a year, instead of once doubles the total number of cash flows to be discounted in the PV f

10、ormula.,Discount RateSince the time periods are now half years, the discount rate is also changed from the annual rate to the half year rate.,,,Bond Yields,Current Yield - Annual coupon payments divided by bond price.Y

11、ield To Maturity - Interest rate for which the present value of the bond’s payments equal the price.,,,Bond Yields,Calculating Yield to Maturity (YTM=r)If you are given the price of a bond (PV) and the coupon rate, the

12、 yield to maturity can be found by solving for r.,,,Bond Yields,ExampleWhat is the YTM of a 6 % annual coupon bond, with a $1,000 face value, which matures in 3 years? The market price of the bond is $1,010.77,,,Bond Y

13、ields,WARNINGCalculating YTM by hand can be very tedious. It is highly recommended that you learn to use the “IRR” or “YTM” or “i” functions on a financial calculator.,,,Bond Yields,Rate of Return - Earnings per pe

14、riod per dollar invested.,Interest Rate Risk,Premium Bond,Discount Bond,Interest Rate Risk,30 yr bond,3 yr bond,Nominal and Real rates,Yield on UK nominal bonds,Yield on UK indexed bonds,Default Risk,Credit riskDefault

15、premiumInvestment gradeJunk bonds,Default Risk,Corporate Bonds,Zero couponsFloating rate bondsConvertible bonds,,,The Yield Curve,Term Structure of Interest Rates - A listing of bond maturity dates and the interest r

16、ates that correspond with each date.Yield Curve - Graph of the term structure.,Web Resources,www.finpipe.comwww.investinginbonds.comwww.bloomberg.com/markets/C13.htmlwww.bondmarkets.com/publications/IGCORP/what.htm