Class 6&7

Class 6&7 - BondMarketsandInterestRates

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Bond Markets and Interest Rates  Applying Discounted Cash Flow Valuation  into Bonds 
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Remember The price/current value of any financial  asset is the present value of its future cash  flows
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Bond Markets Over-the-counter dealer market Not as transparent as stock markets U.S treasury market, a bond market, is the  largest securities market in the world in  terms of trading volume
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Basic Bond Terminology A bond is a fixed-income asset The issuer borrows money from the  bondholder and promises to pay a fixed  interest (coupon) at fixed intervals and  the principal amount (face value) at a  specified date in the future (maturity) 
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Basic Bond Terminology Coupon  : The stated interest payment made on a  bond Maturity : The date on which the issuer has to  repay the principal amount Face (Par) Value  : The principal amount that is  repaid at the end of maturity Yield or Yield-to-Maturity (YTM) : The market  interest rate that investors require on a bond
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Stream of Fixed Payments
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Bond Valuation What would be the value of this bond if  the yield on similar bonds is 8%? Value of the bond = PV of Cash Flows = PV of Coupons + PV of the Face Value = 80 x (1 – 1/1.0810)/0.08 +  1,000/1.0810  = $ 1,000
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Bond Pricing Formula (nothing special) t t r) (1 FV r r) (1 1 - 1 C Value Bond + + + =
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Another Example – 1  Consider a bond with a coupon rate of 10% and  annual coupons. The par value is $1,000, and  the bond has 5 years to maturity. The yield to  maturity is 11%. What is the value of the bond? B = PV of coupons + PV of face value B = 100[1 – 1/(1.11)5] / .11 + 1,000 / (1.11)5 B = 369.59 + 593.45 = 963.04
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Suppose you are reviewing a bond that has a  10% annual coupon and a face value of $1000.  There are 20 years to maturity, and the yield to  maturity is 8%. What is the price of this bond? B = PV of coupons + PV of face value
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Class 6&7 - BondMarketsandInterestRates

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