Professional Documents
Culture Documents
What is a bond?
7-2
Bond markets
k
Value
...
CF1
CF2
CFn
CF1
CF2
CFn
Value
...
1
2
n
(1 k)
(1 k)
(1 k)
7-8
7-9
k
VB = ?
...
100
100
100 + 1,000
$100
$100
$1,000
VB
...
1
10
(1.10)
(1.10)
(1.10)10
VB $90.91 ... $38.55 $385.54
VB $1,000
7-10
OUTPUT
10
10
I/YR
PV
100
1000
PMT
FV
-1000
7-11
An example:
Increasing inflation and kd
OUTPUT
10
13
I/YR
PV
100
1000
PMT
FV
-837.21
7-12
An example:
Decreasing inflation and kd
INPUTS
OUTPUT
10
I/YR
PV
100
1000
PMT
FV
-1210.71
7-13
VB
1,372
1,211
kd = 7%.
kd = 10%.
1,000
837
775
kd = 13%.
30
25
20
15
10
Years
to Maturity
7-14
INT
INT
M
VB
...
1
N
N
(1 kd )
(1 kd )
(1 kd )
90
90
1,000
$887
...
1
10
10
(1 kd )
(1 kd )
(1 kd )
7-16
INPUTS
10
N
OUTPUT
I/YR
- 887
90
1000
PV
PMT
FV
10.91
7-17
INPUTS
10
N
OUTPUT
I/YR
-1134.2
90
1000
PV
PMT
FV
7.08
7-18
Definitions
Annual coupon payment
Current yi
eld(CY)
Currentprice
Changein price
Capitalgainsyield(CGY)
Beginningprice
Expected
Expected
Expectedtotalreturn YTM
CY CGY
7-19
An example:
Current and capital gains yield
= $90 / $887
= 0.1015 = 10.15%
7-20
% change 1 yr
kd
+4.8% $1,048
5%
$1,000 10%
$1,000
-4.4%
$956
15%
10yr
$1,386
$749
% change
+38.6%
-25.1%
Long-term
Interest
rate risk
Low
High
Reinvestme
nt rate risk
High
Low
7-25
Semiannual bonds
2.
3.
1.
INPUTS
2n
kd / 2
OK
cpn / 2
OK
I/YR
PV
PMT
FV
OUTPUT
7-26
INPUTS
OUTPUT
20
6.5
I/YR
PV
50
1000
PMT
FV
- 834.72
7-27
EFF% 1
1 1
1 10.25%
m
2
7-28
INPUTS
OUTPUT
10
10.25
I/YR
PV
100
1000
PMT
FV
- 984.80
7-29
INPUTS
8
N
OUTPUT
I/YR
- 1135.90
50
1050
PV
PMT
FV
3.568
7-30
Yield to call
7-33
Default risk
Types of bonds
Mortgage bonds
Debentures
Subordinated debentures
Investment-grade bonds
Junk bonds
7-35
Junk Bonds
Moody
s
Aaa Aa A Baa
Ba B Caa C
S&P
AAA AA A BBB
BB B CCC
D
Financial performance
Debt ratio
TIE ratio
Current ratio
Earnings stability
Regulatory environment
Potential antitrust or product
liabilities
Pension liabilities
Potential labor problems
Accounting policies
7-38
Bankruptcy
7-39
Priority of claims in
liquidation
1.
2.
3.
4.
5.
6.
7.
8.
Reorganization