MGMT310_lecture15

MGMT310_lecture15 - Announcements Announcements...

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Announcements Exam tomorrow: Tues. March 9 Time: 8:00 – 9:30 pm Section 2 (i.e., 1:30 class), go to FRNY G140 Sections 3 & 4 (i.e., 3:00 and 4:30 classes), go to PHYS 112 I will hold extended office hours today (6:00 pm to 10:00 pm) NO CLASS on Wed. March 10
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Exam reminders You may only bring pen/pencil and a calculator (no sharing!!) Seating arrangement: every other seat Do not open exam until it’s officially started Please be easy on the grader. Round your interim work and final answers at least to the nearest three decimal places / (remember: w/ compounding, rounding errors blow up!!). Show your work where applicable. Review syllabus for policy on academic dishonesty
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Bond review Consider: 10% coupon bond with face value of $1000, maturing in five years, ytm = 8%, and coupons paid semi annually (assume semi annual coupon was *just* paid) Recall some bond terms: face value, time to maturity, coupon rate, current yield, yield to maturity, effective annual yield, duration Premium, discount, or par value bond When provided the price and coupon rate of a T year coupon bond, only way to find ytm is through brute force (keep guessing until it works out) We can however know whether ytm is > = or < the coupon rate We can, however, know whether ytm is >, , or < the coupon rate T T F 1 1 r Price = C + 1+ r r = PV of coupons + PV of face val e u
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Zero coupon bonds Consider: zero coupon bond with face value of $1000, maturing in three years, priced at $750. No interim coupon payments (just the face value payment made at maturity): Price = PV(face value) Also called pure discount bonds Can directly calculate ytm (no guesswork required) Spot rate = ytm on zero coupon bond
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Factors that affect bond prices Expected inflation Nominal rate How much is cost of goods generally increasing Real rate of interest How much is your real buying power increasing rate at which your $$ increases = (1 + inflation) * (1 + real) 1 Interest rate risk Some bonds more sensitive to fluctuations in interest rates D f l i k Default risk Might not get $$ you were promised Tax considerations Bonds aren’t taxed equally Liquidity Some bonds more difficult to quickly unload than others Take away: Something favorable means price will be higher (or, ytm will be lower)
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Bond review q’s Bond review q s 1. The duration on Bond A is greater than that on Bond B. Suppose that the inflation rate suddenly increases.
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