Fixed Income Securities
and Markets
Chapter 3
Yield-to-Maturity
Yield- to-
Each cash flow of a fixed income security
Each
must be discounted at the factor or rate
appropriate for the term of that cash
Cal Poly State University
BUS 439
Orfalea College of Business
Current Event # 2
Prof. Mahdi Rastad
Analyzing FOMC Minutes
and the Future of Interest Rates
1. Based on the latest FOMCs meeting minutes
1. A pension fund manager invests $10 million in a debt obligation that promises to pay 7.3% per year for four
value of the $10 million?
PV
10,000,000.00
Rate
7.30%
Maturity (yrs.)
4.0
FV
13,255,584.6
Toy World
Net Sales
COGS
70%
Gross margin
Jan.
120
84
36
Feb
140
98
42
Mar
160
112
48
Apr
140
98
42
May
140
98
42
Jun
140
98
42
Jul
Aug
Sep
Oct
Nov
160 1,620 1,840 2,140 2,285
112 1,134 1,288 1,498 1,
The Acquisition of Consolidated Rail Corporation
Overall Strategy:
1. Understand the value of Conrail to CSX and, for that matter, Norfolk Southern.
2. Realize the coercive nature of the merger offer
1. What is the equivalent taxable yield for an investor facing a 40% marginal tax rate, and who can purchase
yield of 7.2?
Marginal tax rate
40.0%
Yield
7.2%
Equiv. Taxable Yield
12.0%
2. What is the
Prob. 1
CF
$
Start
(7,704)
1
2,000
2
2,000
3
2,500
4
4,000
Yield
11.9870%
Prob. 2
Semiannual rate
Annual rate
4.3%
8.7849%
Prob. 3
YTM is the rate at which
the PV of the CF = price
of the bond
YTM
Sta
marginal tax rate
40.00%
yield
7.20%
taxable yield
12.00%
An investor in the 40% marginal tax bracket is eligible to purchase this tax-exempt municipal bond
The yield ratio is the yield on the municip
1. What factors allowed JLR to refinance its 2011 debt at a much lower coupon?
Its debt rating improved from 8.125% to 3.5% (462.5 bps) because of lower overall interest rates (26 bps) and
improved cr
Problem 1
Par
1,000.00
Conversion/share
45.00
Conversion ratio
22.22
Problem 2a
Par
1,000.00
Coupon
9.50%
Market price
1,000.00
Conversion ratio
37.383
Straight price
510.00
Straight YTM
18.70%
Stock
Fixed Income Securities
Fixed
and Markets
Chapter 2
Bond Prices, Spot Rates, and
Forward Rates
Effective Annual Rates
and Compounding
Quoted as 5% per annum
Quoted
compounded semiannually, or 5%
compo
Fixed Income Securities
and Markets
Chapter 1
Bond Prices, Discount Factors,
and Arbitrage
Overview
Bond Prices
Discount Factors
Arbitrage
Bond Basics
Face
Value,
Coupons (annual, semiannual, )
Zero-C
Fixed Income Securities
and Markets
Chapter 5
One-Factor Measures of Price
OneSensitivity
How much price changes
as interest rates change
Initial + shifted rate curve
Initial
computing prices is
compu
Fixed Income Securities
and Markets
Chapter 4
Generalizations and Curve Fitting
Overview
Cash flow not on even six-month
intervals:
Accrued interest
Compounding conventions other than
semiannual
Curve
Cal Poly State University
BUS 439
Orfalea College of Business
Current Event # 1
Prof. Mahdi Rastad
Federal Reserves and
Quantitative Easing Program
1. What are three policy tools that Fed relies on to