Ch 7 - Chapter 7 Bond Markets . 1 How Bond Markets...

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1 Chapter 7 Bond Markets .
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2 How Bond Markets Facilitate the Flow of Funds
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3 Types of Bonds Bearer bonds require the owner to clip coupons attached to the bonds Registered bonds require the issuer to maintain records of who owns the bond and automatically send coupon payments to the owners
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4 Bond Yields The issuer’s cost of financing is measured by the yield to maturity YTM= annualized yield that equates the future coupon and principal payments to the initial proceeds received Based on the assumption that coupon payments can be invested at the same rate YTM= interest rate earned if you purchase the bond @ issue and hold until maturity
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5 Example Calculate the YTM for a 7% coupon Treasury Bond with 10 years remaining until maturity purchased today for $965. Assume semiannual coupon payments and a $1,000 par value % 75 . 3 / 35 2 / 70 20 ) 2 ( 10 000 , 1 965 = = = = = = = - = YTM y i PMT N FV PV
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6 Treasury Bonds Bonds maturities are 10 years or more Active secondary market exists Dealer market Sold in auction format Competitive & noncompetitive bids
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7 Bond Quotations Bond prices are quoted in 32nds How much would you pay for this bond? 75 . 718 , 120 $ ) 000 , 100 ($ 2071875 . 1 000 , 100 $ % 71875 . 120 71875 . 32 / 23 23 : 120 = = = of ask
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8 Stripped Treasury Bonds One security is divided into two: PO=principle only IO= interest only Examples: TIGRs STRIPS
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Ch 7 - Chapter 7 Bond Markets . 1 How Bond Markets...

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