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Paid being moodys d and sp d in default with principal

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Unformatted text preview: al bond has a yield of 6% municipal If you are in a 40% tax bracket, which bond do you If prefer? prefer? • 8%(1 - .4) = 4.8% • The after-tax return on the corporate bond is 4.8%, The compared to a 6% return on the municipal compared At what tax rate would you be indifferent between the At two bonds? two • 8%(1 – T) = 6% • T = 25% 28 Zero Coupon Bonds Make no periodic interest payments (coupon rate = 0%) The entire yield-to-maturity comes from the difference The between the purchase price and the par value between Cannot sell for more than par value Sometimes called zeroes, deep discount bonds, or Sometimes original issue discount bonds (OIDs) original Treasury Bills and principal-only Treasury strips are Treasury good examples of zeroes good 29 Floating-Rate Bonds Coupon rate floats depending on some index value Examples – adjustable rate mortgages and inflationlinked Treasuries There is less price risk with floating rate bonds The coupon floats, so it is less likely to differ substantially The from the yield-to-maturity from Coupons may have a “collar” – the rate cannot go above Coupons a specified “ceiling” or below a specified “floor” specified 30 Other Bond Types Disaster bonds Income bonds Convertible bonds Put bonds There are many other types of provisions that There can be added to a bond and many bonds have several provisions – it is important to recognize how these provisions affect required returns how 31 Bond Markets Primarily over-the-counter transactions with Primarily dealers connected electronically dealers Extremely large number of bond issues, but Extremely generally low daily volume in single issues generally Makes getting up-to-date prices difficult, Makes particularly on small company or municipal issues issues Treasury securities are an exception 32 Work the Web Example Bond quotes are available online One good site is Bonds Online Click on the web surfer to go to the site Follow the bond search, corporate links Choose a company, enter it under Express Search Choose Issue and see what you can find! Issue 33 Treasury Quotations Highlighted quote in Figure 7.4 8 Nov 21 128:07 128:08 5 5.31 What is the coupon rate on the bond? When does the bond mature? What is the bid price? What does this mean? What is the ask price? What does this mean? How much did the price change from the previous How day? day? What is the yield based on the ask price? 34 Clean vs. Dirty Prices Clean price: quoted price Dirty price: price actually paid = quoted price plus Dirty accrued interest accrued Example: Consider T-bond in previous slide, assume Example: today is July 15, 2007 today Prices (based on ask): Number of days since last coupon = 61 Number of days in the coupon period = 184 Accrued interest = (61/184)(.04*100,000) = 1,326.09 Clean price = 128,250 Dirty price = 128,250 + 1,326.09 = 129,576.09 So, you would actually pay $ 129,576.09 for the bond 35 Inflation and Interest Rates Real rate of interest – change in purchasing Real power power No...
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