{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Class Note 10_S2009 - RSM 330 Investments Class Note 10...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
RSM 330 - Class 11 Summer 2010 1 RSM 330 - Investments Class Note 10 – Bonds August 10, 2020 Maureen Stapleton, CFA
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
RSM 330 - Class 11 Summer 2010 2 Information Final Exam Covers all course material Monday, August 16 from 7 to 9 pm in EX 300, 255 McCaul St. Crib sheet – 8.5x11 inches - 2 sides Multiple choice, short answer questions on concepts, problems Checklist posted on Blackboard Two classes remaining – Bonds & bond portfolio management Assignment 2 is due today Project is due Tuesday, August 17 at 4 pm in RT 469 Exam Review Session: August 12 after class???
Image of page 2
RSM 330 - Class 11 Summer 2010 3 Plan for today Bonds & the Term Structure of Interest Rates Bond Basics – Yield to maturity, spot rate, forward rate – Slope of the yield curve, coupon stripping Theories of term structure ( ie the shape of the yield curve) – Expectations Hypothesis – Liquidity Premium Hypothesis Readings : Bodie: Sections 13.2-13.3, 14.1-14.5 Optional: “Riding the Bill Curve” and “The Relative Performance of Yield Curve Strategies”
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
RSM 330 - Class 11 Summer 2010 4 Calculating the yield to maturity of a bond Review of RSM 230 Example : A 2-year Treasury bond with 9.125% coupon, selling at $105.18 (The market price is 105.18% of the face value of the bond) – Face value of $1,000 will be received as principal repayment at maturity Semi-annual cash flows are (0.09125)(1000)/2 = $45.63 Market price : You pay (1.0518)(1000) = $1051.80 today Yield to maturity (YTM ), y, is the discount rate that satisfies – The market convention is to quote the Bond Equivalent Yield: BEY = 2 × YTM, which is an approximate annualized version of ( 29 ( 29 ( 29 ( 29 80 . 1051 1 63 . 1045 1 63 . 45 1 63 . 45 1 63 . 45 4 3 2 = + + + + + + + y y y y
Image of page 4
RSM 330 - Class 11 Summer 2010 5 Bond price is inversely related to YTM or BEY , ……….but it is positively related to the bond’s coupon rate. Note the following relations between the bond price (P) and the face value (F). If coupon rate = BEY, then P = F. The bond sells at par. – If coupon rate > BEY, then P > F. The bond sells at a premium. – If coupon rate < BEY, then P < F. The bond sells at a discount. In general, YTM is not equal to the average return on the bond . YTM = average return only if the following two conditions hold. 1. The investor holds the bond to maturity. If the investor does not hold the bond to maturity, the return is called the holding period return , which can be very different from the
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
RSM 330 - Class 11 Summer 2010 6 The risk structure of interest rates Default or “credit” spreads Consider bonds that have same term to maturity but different credit risks.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern