Bd1_lecture

# Bd1_lecture - Debt Markets Outline Debt Markets 1 Bonds 1:...

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Bonds 1: Bond Pricing Basics Coupon bonds/zero-coupon bonds Yield computations Determinants of yields Term structure of interest rates Debt Markets Outline Debt Markets Outline Bond Pricing Basics Coupon bonds/zero-coupon bonds Determinants of yields Term structure of interest rates Bond ratings Debt Markets 1 Bond Pricing - Advanced Concepts Duration and convexity Changing re-investment rates Accrued interest: clean price versus dirty price Money Markets Day/year conventions Discount yield versus true yield Debt Markets 2 Capital Markets Government T-bills and Bonds Govt. bond auction pricing mechanisms Singapore government bonds (SGS bonds) Corporate bonds Debt Markets 3 3/31 Roger Loh Pricing Coupon Bonds ± The value of a bond is the present value of future cash flows discounted at the market rate of interest. { Ci is the coupon payment and Fn is the face (par) value of the bond. { Cash flows are assumed to flow at the end of the period and are assumed to be reinvested at i. i) + (1 F + C ... + i) + (1 C + i) + (1 C = Price n n n 2 2 1 1 + Factors affecting yields Term Struct. Yields Pricing Basics 4/31 Roger Loh Pricing Zero Coupon Bonds ± Bonds that do not pay coupon interest are called zero-coupon bonds. ± Zero coupon bonds trade at a discount to par value. (caveat: almost always!) ± The value of the "zero" bond is i) + (1 F = Price n n Factors affecting yields Term Struct. Yields Pricing Basics

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5/31 Roger Loh 6/31 Roger Loh Example 1 – Annual Coupon ± A bond has a par value of \$1000. It pays an annual coupon of 4% and will mature in 2 year’s time. If the current market interest rate for 2 year bonds is 3%, compute the price of this bond. Factors affecting yields Term Struct. Yields Pricing Basics 7/31 Roger Loh Example 2 – Semiannual Coupon ± A bond has a par value of \$1000. It’s coupon rate is 4%, paid semiannually . It will mature in 2 year’s time. If the current market interest rate for 2 year bonds is 3%, compute the price of this bond. Factors affecting yields Term Struct. Yields Pricing Basics 8/31 Roger Loh Example 3 – Zero Coupon ± A bond has a par value of \$1000. It has no coupon (ie zero coupon). It will also mature in 2 year’s time. If the current market interest rate for 2 year bonds is 3%, compute the price of this bond. Factors affecting yields Term Struct. Yields Pricing Basics
9/31 Roger Loh Yields Yield to Maturity ± The yield to maturity (YTM) is the investor's expected or promised yield if the bond is held to maturity and the cash flows are reinvested at the yield to maturity . ± Bond YTMs vary inversely with bond prices. { If the market price of the bond increases, the yield to maturity declines. { When the bond is selling at par, the coupon rate

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## Bd1_lecture - Debt Markets Outline Debt Markets 1 Bonds 1:...

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