Bus 315 - Week4

Bus 315 - Week4 - Week 4 Fixed Income Securities I: Bond...

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Week 4 Fixed Income Securities I: Bond Prices and Yields - Bodie et al., Ch. 13 1 Jorge Cruz Lopez - Bus 315: Investments
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Bond Prices and Yields Objective: To review the principles of bond pricing and to study the determinants of credit risk. 2 Jorge Cruz Lopez - Bus 315: Investments
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Bond Prices and Yields 1. Bond Characteristics 2. Bond Pricing and YTM 3. Taxation Issues 4. Default Risk and Ratings 3 Jorge Cruz Lopez - Bus 315: Investments
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1. Bond Characteristics 4 Jorge Cruz Lopez - Bus 315: Investments
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Bond Characteristics • Face or Par Value • Coupon Rate – Zero coupon bond • Compounding and Payments – Accrued interest and quoted price. • Indenture 5 Jorge Cruz Lopez - Bus 315: Investments
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Different Issuers of Bonds • Canada bonds • Provincial government bonds • Corporations • Municipalities • International Governments and Corporations • Innovative Bonds – Indexed Bonds – Floaters and Reverse Floaters – Asset-Backed – Catastrophe 6 Jorge Cruz Lopez - Bus 315: Investments
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Provisions of Bonds • Secured or unsecured • Registered or bearer bonds (Canada) • Call provision • Convertible provision • Retractable and extendible (putable) bonds • Floating rate bond • Sinking funds 7 Jorge Cruz Lopez - Bus 315: Investments
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Real Return Bond 8 Jorge Cruz Lopez - Bus 315: Investments
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2. Bond Pricing and YTM 9 Jorge Cruz Lopez - Bus 315: Investments
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Bond Pricing P B = price of the bond C t = interest or coupon payments T = number of periods to maturity r = the appropriate semi-annual discount rate 10 T T T 1 t t t B ) r 1 ( Value Par ) r 1 ( C P Jorge Cruz Lopez - Bus 315: Investments
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Solving for Price • Bond Characteristics: 30-yr, 8% Coupon Bond, FV = $1,000 11 C t = 40 (SA) P = 1000 T = 60 periods r = 5% (SA) 60 60
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Bus 315 - Week4 - Week 4 Fixed Income Securities I: Bond...

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