181017 fixed income securities 20 categories price vs

Info icon This preview shows pages 20–29. Sign up to view the full content.

View Full Document Right Arrow Icon
18/10/17 Fixed Income Securities 20 Categories Price vs. Par Value Yield vs. Coupon At Par P 0 =100 Yield=Coupon At Premium P 0 >100 Yield<Coupon At Discount P 0 <100 Yield>Coupon
Image of page 20

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Time Effect on Bond Prices Features Bond 1 Bond 1 Bond 1 Bond 1 N Time to Maturity 4 3 2 0 I/YR Yield per year 6 6 6 6 FV Face Value 100 100 100 100 PMT Coupon 5 5 5 5 PV Priced at discount 96.53 97.32 98.17 100 18/10/17 Fixed Income Securities 21 Features Bond 2 Bond 2 Bond 2 Bond 2 N Time to Maturity 4 3 2 0 I/YR Yield per year 4 4 4 4 FV Face Value 100 100 100 100 PMT Coupon 5 5 5 5 PV Priced at premium 103.63 102.76 101.89 100
Image of page 21
Time Effect on Bond Prices The price of a bond trades either at par (=100), discount (<100) or premium (>100). At maturity bond price is always par (=100). 18/10/17 Fixed Income Securities 22 T=4 yr P T =100 Trades at premium Trades at discount Price Maturity
Image of page 22

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Yield Effect on Bond Prices 18/10/17 Fixed Income Securities 23 Calc Features Bond1 Bond2 Bond3 Bond4 Bond5 Bond6 N Time to Maturity 10 10 10 10 10 10 I/YR Yield 2 3 4 5 6 7 FV Face Value 100 100 100 100 100 100 PMT Coupon 5 5 5 5 5 5 PV Price 126.92 117.06 108.11 100 92.64 85.95
Image of page 23
Yield Effect on Bond Prices 1. Bond price is inversely related to the yield level. The higher the yield the lower the price and vice-versa. 2. The price is very (less) sensitive at low (high) yield levels. 18/10/17 Fixed Income Securities 24 Yield Price The relationship is convex
Image of page 24

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Time and Yield Effect on Bond Price Example: A 4-year 5.8% coupon bond is selling at 7% yield. The bond pays interest annually. One year later interest rate decreases from 7% to 6.2%. a. What is the price of the 4-year 5.8% coupon bond selling to yield 7%? b. What is the price of the bond one year later assuming the yield is unchanged at 7%? c. What is the price of the bond one year later at 6.2%yield? Time effect: Keeping yield unchanged, a 3yr bond price is worth $96.81. That is $0.87 dollar increase from previous level. Yield effect: Keeping time constant, a 0.8% decrease in yield (from 7% to 6.2%) boosts the price at $98.94 level. That is $2.31 increase due to lower yield. 18/10/17 Fixed Income Securities 25
Image of page 25
Conventional Yield Measures 1. The Internal Rate of Return (IRR). It is the yield of the investment that makes the present value of the future cash flows equal to the cost of initial investment. 2. The Yield to Maturity. It is the yield of the investment that makes the present value of the future cash flows equal to the actual bond price. 18/10/17 Fixed Income Securities 26
Image of page 26

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Conventional Yield Measures: IRR 1- The Internal Rate of Return is the rate that makes the present value of the future cash inflows equal to the cost of investment . , where n is the nr of holding periods and t denotes time. o The IRR is determined from the sum of bond price+ reinvested coupons relative to the initial purchasing cost. o The IRR is a backward looking concept, that applies to various type of investments. 18/10/17 Fixed Income Securities 27 ( ) n n t t n t n r y coupons price Bond P t Initial + + + = = = 1 ) 1 ( _ cos 1 0
Image of page 27
Conventional Yield Measures: IRR Example: Bond A has the following features: C=8%, y=8%, N=5 year. Assuming that the yield will not change, what is the IRR should you buy now and hold the bond until the end of the 1st, 2nd, 3rd, and 4th or maturity?
Image of page 28

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 29
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern