Lecture 3

Lecture 3 - IMSE3010 Financial Engineering Lecture 3...

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Unformatted text preview: IMSE3010 Financial Engineering Lecture 3 Fixed-Income Securities ommon Stocks Common Stocks Miao Song Dept of Industrial & Manufacturing Systems Engineering eview of Lecture 2 Review of Lecture 2 Present Value Annuity and Perpetuity y p y Mortgage Calculation Fixed-Income Securities Fixed-Income Markets Term Structure of Interest Rate ond Pricing Bond Pricing 1/25/2011 2 1/25/2011 2 iscount Bonds vs Coupon Bonds Discount Bonds vs. Coupon Bonds Discount Bond Get $1 payment at maturity t 1 / (1 + t B t = 1 / (1 + r t ) Coupon Bond Definition Maturity T Coupon rate c ace value / principle P Face value / principle P Cash Flow Get coupon C = c×P at any time t = 1,…,T Get principle P at maturity T B = B 1 ×C + B 2 ×C + … + B T ×C + B T ×P 1/25/2011 3 genda Agenda Fixed-Income Securities Yield-To-Maturity Forward Interest Rates isks Associated with Bonds Risks Associated with Bonds Common Stocks 1/25/2011 4 1/25/2011 4 ield aturity Yield-to-Maturity What is the average annual return (IRR) if an investor buys the bond today and holds it until aturity? maturity? Yield-to-maturity of a bond, denoted by y, is given y by Given maturity, principle and coupon rate, one to ne mapping between YTM and bond price one mapping between YTM and bond price In the market, it is conventional to quote bond rices in YTM prices in YTM 1/25/2011 5 xample Example urrent 1 nd 2 ear spot interest rates are 5% and 6% Current 1- and 2-year spot interest rates are 5% and 6%, respectively. What is the price of a 2-year Treasury coupon bond with par value of $100 and a coupon rate of 6%? What is the YTM? What is the difference between YTM definition and bond pricing formula? What is the YTM of discount bonds? 1/25/2011 6 olver Add in Excel 2007 Solver Add-in in Excel 2007 lick the Microsoft Office Button and then click Excel Click the Microsoft Office Button, and then click Excel Options. Click Add-Ins, and then in the Manage box, select Excel Add- ins. Click Go. In the Add-Ins available box, select the Solver Add-in check box, and then click OK. Tip: If Solver Add-in is not listed in the Add-Ins available box, click Browse to locate the add-in. If you get prompted that the Solver Add-in is not currently installed on your computer, click Yes to install it. After you load the Solver Add-in, the Solver command is available in the Analysis group on the Data tab....
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This note was uploaded on 12/09/2011 for the course IMSE 0301 taught by Professor Song during the Spring '11 term at HKU.

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Lecture 3 - IMSE3010 Financial Engineering Lecture 3...

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