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 flow.
Yield-to-Maturity
Yield- toYield-to-maturity, or
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 what was decided about the changes in
interest rates? D
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
13,255,584.66
2. Suppose that a life insurance company has guarante
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 and its impact of possible suitors.
3. Understand the i
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 yield ratio and why is it typically less than 1?
The yi
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 municipal bond divided by the yield on the same maturity treas
Issuer
Time Warner Cable
McCormick & Co.
Goldman Sachs
Problem 1
Treasury Benchmark
Yield Benchmark
Spread
6.373%
4.518%
1.855%
5.685%
4.096%
1.589%
4.773%
3.507%
1.266%
Relative
Spread
41.058%
38.794%
36.099%
Problem 2
Bond U may be callable so the sprea
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 credit quality (436.5 bps)
2. Assuming a May 2015 tender,
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%
compounded semiannually.
Means paying 2.5% every six months.
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-Coupon Bond
Par
Value
Maturity
Coupon Rate = Annual Coup
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
computing
straightforward
Defining changes in interest rates
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 fitting techniques to estimate
discount factors for an
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 execute its monetary policy?
1) Open market operations