Lecture+15+Nov+7+2011

Lecture+15+Nov+7+2011 - FINA3104 Lecture15 DarwinChoi...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 15 – Fixed Income Securities Darwin Choi November 7, 2011 Recap from Last Lecture Testing Market Efficiency Serial Correlation Event Studies Anomalies Behavioral Finance: An Introduction Information Processing Biases Limits to Arbitrage 2
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Outline of Today’s Lecture Yield to Maturity Yield to to Maturity 3 Face Value $1000 Coupons $50 Bond Certificate Bond Issuer Sells Bonds Face Value $1000 Coupons Bond Certificate Face Value $1000 Coupons Bond Certificate Face Value $1000 Coupons Bond Certificate Bond Investors Buy Bonds Bond Certificates $$$ 4
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Bond Value What Is a Bond? A Series of Fixed Income Flows Time, t 0 Face Value Coupons Coupons T T-1 T-2 1 2 Bond Value =Amount Paid by the Investor to Buy the Bond Coupons = Interest Paid to the Investor for Holding the Bond Face Value =Amoun t Paid to the Investor at Maturity ( T ) 5 How Is a Bond Priced (Valued)? As the Present Value (PV) of Its Flows Bond Value = PV ( Coupons ) + PV ( Face Value ) Bond Value = Coupon Annuity Factor ( r , T ) Face Value PV Factor ( r , T ) + = T t t r Coupon 1 ) 1 ( + T r Value Face ) 1 ( + T r Value Face ) 1 ( = T r r Coupon ) 1 ( 1 1 6 (Assuming that the discount rate
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= 60 ) 04 . 1 ( 1 04 . 0 40
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Lecture+15+Nov+7+2011 - FINA3104 Lecture15 DarwinChoi...

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