{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

13 14 Bond Prices and Term Structure Brief

# 13 14 Bond Prices and Term Structure Brief - Bond Valuation...

This preview shows pages 1–11. Sign up to view the full content.

Comm367 1 COMM 367 Bond Valuation and Term Structure of Interest Rates

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

View Full Document
Comm367 2 Pricing of Coupon Bonds u Bond Value = PV Coupons + PV Face Value If the interest rate is constant, where: C = Coupon paid each period r = Discount rate per period t = Number of periods t T t t B r F r C P ) 1 ( ) 1 ( 1 + + + = =
Comm367 3 Valuing Coupon Bonds: Example 1 A bond has five years to maturity, an \$80 annual coupon, and a \$1000 face value. If the going rate on bonds like this one is 10%, How much is this bond worth? Time 0 1 2 3 4 5 Coupons \$80 \$80 \$80 \$80 \$80 Face Value \$1000 Answer: \$924.18

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

View Full Document
Comm367 4 Valuing Coupon Bonds: Example 2 Consider a 2-year U.S. Treasury Note with annual coupon rate of 8% (coupons paid semiannually) and face value \$1000. The YTM is 10%. What is the fair price of the T-note today? Note: The effective annual yield is (1+5%)2 -1 = 10.25% 54 . 964 \$ ) 05 . 1 ( 1000 ) 05 . 1 ( 40 4 4 1 0 = + = = t t P
Comm367 5 Holding Period Returns of Bonds u Dollar returns from holding a bond for a certain period Coupon income Capital gain/loss u One-period holding period return yield   gain   capital     yield   current loss) (or    gain   Capital Income   Coupon HPR  0 0 + = + = P P

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

View Full Document
Comm367 6 Valuing Coupon Bonds: Example 2 (Cont’d) u Suppose you decide to sell the bond right after you receive the 1st coupon and the yield (YTM) remains the same. What is your HPR? 3 1 40 (5% , 3) 1000 / (1.05) \$972.77 40 972.77 964.54 964.54 964.54 4.15% 0.85% 5% P PVAF HPR = × + = - = + = + =
Comm367 7 Valuing Coupon Bonds: Example 2 (Cont’d) u Suppose you decide to sell it right after you receive the 1st coupon when the yield (YTM) drops to 6%. What is your HPR? 3 1 40 (3% , 3) 1000 / (1.03) \$1028.29 40 1028.29 964.54 964.54 964.54 4.15% 6.61% 10.76% P PVAF HPR = × + = - = + = + =

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

View Full Document
Comm367 8 Some Results u Coupon rates and bond prices If C/F > YTM, then P0 > F sell at a premium If C/F = YTM, then P0 = F sell at par If C/F < YTM, then P0 < F ° sell at a discount u What causes bond prices to change? Change in interest rates Passage of time prices of discount bonds are expected to
Comm367 9 Price Paths of Coupon Bonds Price 1,000 Maturity date 0 Discount bond Time Premium bond

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

View Full Document
Comm367 10 Alternative Views of Yield to Maturity Promised compound rate of return “Current” rate that current bond issues are paying
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 30

13 14 Bond Prices and Term Structure Brief - Bond Valuation...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online