Bond Valuation
Valuation of Option-Free Bonds
General Principles of Valuation:
1. Estimate the expected future cash flows
2. Determine the appropriate discount rate(s)
3. Calculate the present values
Valuation of Option-Free Bonds
Estimating the cash flow
Features Of Fixed Income
Securities
Lecture 2
Sectors of U.S. Bond Market
Treasury
Agency
Municipal
Corporate
Mortgage
Asset-Backed
Bond Features
A fixed income security is one in which the
issuer (borrower) has agreed to make
interest (income) pay
Fixed-Income Securities
FINA 475
John DeMeo
Historical 10 Year Yields
Main Course Components
Fixed-income products
Analytical tools
Institutional features
Fixed-income portfolio management
Size of U.S. Bond Market
Largest capital market in the world!
Fixe
Fixed Income Securities
Recap
Bond Market Info
http:/www.wsj.com/public/page/news-fixed-income-bonds.html
https:/www.briefing.com/investor/markets/bond-market-updat
e
/
http:/www.bloomberg.com/markets/rates-bonds
Definition of a Bond
A bond is a security
Return Measures
Sources of a Bonds Dollar Return
Periodic Coupon Interest Payments
Any Capital Gain (or loss) when the bond
matures, is called, is put, or is sold prior to
maturity
Interest Income earned from reinvestment of
periodic cash flows - e.g.,
Yield Curve Analysis
Steven V. Mann
Professor of Finance
Moore School of Business
Steven V. Mann, PhD
Defining some terms
Our analysis focuses on government
securities that have known cash flows (no
default risk, no embedded options).
Yield to maturity is
Spot Rates Again?
Out Damn Spot!
THE ARBITRAGE-FREE
VALUATION APPROACH
The traditional approach to valuation is to
discount every cash flow of a bond with
the same discount rate (i.e., assuming that
the yield curve is flat).
For example, consider a 10-yea
Yield Curve Analysis
Defining some terms
Our analysis focuses on government
securities that have known cash flows (no
default risk, no embedded options).
Yield to maturity is the single discount rate
that equates the present value of a bonds
cash flows to
Yield Measures
Yield Measures
Current yield
Yield to maturity
Yield to call/worst
Yield to put
Current yield
Current yield =
Annual
coupon
interest
Bond price
Example: 15 year bond, 7% coupon
M
= $1,000
P = $769.40
Current = 70
769.40
= .0910 Yield
Curren
Bond Valuation
Valuation of Option-Free Bonds
General Principles of Valuation:
1. Estimate the expected future cash flows
2. Determine the appropriate discount rate(s)
3. Calculate the present values
Valuation of Option-Free Bonds
Estimating the cash flow
Chapter 19: Derivative Securities
Chapter Objectives
By the end of this chapter you should be able to:
1. Explain in general terms what a derivative security is
2. Explain what a forward futures contracts are and how financial managers use
them to control
Derivative Securities
1
What is a Derivative?
Characteristics of Derivatives:
Financial security with payoffs that are a
function of value of some underlying asset,
but which does not represent ownership in that
asset.
Derivative's are not "issued" by fi
Maxine Johnson Fin 2030 Quantitative Assignment Week 3
1. Stock. What is the value of a stock with a
a. $2 dividend just paid and an 8% required return with 0% growth?
2.00*1/.08-0=2.00/.08
$25
b. $3 dividend just paid and a 9% required return with 1% gro