Bonds and Stocks - Class Roadmap Bonds Stocks Conclusion...

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Class Roadmap Bonds Stocks Conclusion Bond Pricing, the Term Structure of Interest Rates and Stock Pricing Ding Ding University of Toronto September 28, 2011 D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Class Roadmap Bonds Bonds and Bond Markets Bond Pricing The Yield Curve Forward Rates Stocks Stocks and Equity Financing Valuation D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Characteristics Bond Pricing Bond Yields Yield to Maturity and Term Structure Bond Characteristics – What is a Bond? A bond is a borrowing arrangement in which the borrower issues (sells) IOU to the investor. Issuer receives a certain amount of money from the Purchaser(Creditor) in return for the bond Issuer is obligated to repay coupons + the principal at the end of the lifetime of the bond (maturity) It specifies Maturity Face/Par Value Coupon Rate ( Coupon = CouponRate × FaceValue No . ofCouponPaymentsPerYear ) D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Characteristics Bond Pricing Bond Yields Yield to Maturity and Term Structure Bond Characteristics – Issuers Governments/Treasuries E.g., T-bills/notes/bonds Municipalities Agencies E.g., CMHC’s Canada Mortgage Bond Program, Ginnie Mae’s Mortgage Bonds, etc Corporations Notes, Debentures, Mortgage-/Asset-backed D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Characteristics Bond Pricing Bond Yields Yield to Maturity and Term Structure Bond Ratings 24.73% Ca Very poor quality C Imminent default or in default Equivalent Credit Ratings Credit Risk Moody's Standard & Poor's Fitch IBCA Duff & Phelps INVESTMENT GRADE Highest quality Aaa AAA AAA AAA High quality (very strong) Aa AA AA AA Upper medium grade (strong) A A A A Medium grade Baa BBB BBB BBB NOT INVESTMENT GRADE Lower medium grade (somewhat speculative) Ba BB BB BB Low grade (speculative) B B B B Poor quality (may default) Caa CCC CCC CCC Most speculative Ca CC CC CC No interest being paid or bankruptcy petition filed C C C C In default C D D D Source: The Bond Market Association D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Characteristics Bond Pricing Bond Yields Yield to Maturity and Term Structure Bond Ratings - Average Default Rates Moody's Rating Average Default Rate Within One Year of Rating (1970-2001) Definition Notes Aaa 0.00% Highest Rating Available Investment grade bonds. Aa 0.02% Very High Quality A 0.01% High Quality Baa 0.15% Minimum Investment Grade Ba 1.21% Low grade Below investment grade. "Junk Bonds" B 6.53% Very speculative Caa 24.73% Substantial Risk Ca Very poor quality C Imminent default or in default D.Ding Bonds and Stocks
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Class Roadmap Bonds Stocks Conclusion Characteristics Bond Pricing Bond Yields Yield to Maturity and Term Structure Bond Characteristics – Zeros Pure discount bonds (zero-coupon bonds) For instance, a Treasury bill (T-bill) It specifies The issuer (government) The face value/par value (e.g.
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