00 positive Bewertungen00 negative Bewertungen

56 Ansichten82 SeitenMar 17, 2014

© Attribution Non-Commercial (BY-NC)

PPT, PDF, TXT oder online auf Scribd lesen

Attribution Non-Commercial (BY-NC)

Als PPT, PDF, TXT **herunterladen** oder online auf Scribd lesen

56 Ansichten

00 positive Bewertungen00 negative Bewertungen

Attribution Non-Commercial (BY-NC)

Als PPT, PDF, TXT **herunterladen** oder online auf Scribd lesen

Sie sind auf Seite 1von 82

Managing Bond

Portfolios

McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

What are fixed income securities?

2

What are fixed income securities?

Investors lend funds to the borrowers

(corporations and governments).

The borrowers are obligated to repay interest

and principal at periodic intervals to the

investors in the future.

3

The global bond market structure

According to Merrill Lynch, Growth trends in

the world bond markets, Jan. 26, 2007:

The total outstanding amounts of the global

corporate bond markets as of August 2007 were

$2,750, $1,424, and $528 billions for US, Europe,

and UK regions, respectively.

Government bonds made up about 53% while

corporate bonds accounted for 18% of

outstanding bonds as of 2006.

4

Components of the global bond market

The international sector of the global bond

market has two components:

Foreign bonds

Eurobonds

5

Foreign bonds

Bond issues sold primarily in one country and denominated

in the countrys currency by a foreign borrower of a

different nationality.

Royal Dutch Shell plc issued USD2750 million, 30-year bonds in

New York in 2008.

Yankee bonds are bonds denominated in US dollars and

issued by a non-US firm in the US.

Dragon bonds are bonds denominated in US dollars and

issued by an Asian (non-Japanese) firm in Asia.

Samurai bonds are yen-denominated bonds sold by non-

Japanese issuers and mainly sold in Japan.

Bulldogs are sterling-denominated bonds issued by non-

British firms and sold in the UK.

6

Eurobonds

Underwritten by international bond syndicates

and sold in general national markets.

McDonalds Corporation issued RMB 200 million in

Hong Kong in 2010

Eurodollar bonds are denominated in US dollars,

underwritten by an international syndicate, and

sold to non-US investors outside the US.

Euro-yen bonds are yen-denominated bonds sold

in the markets outside Japan by international

syndicates.

7

Participating investors

Institutional investors

The minimum investment is too big.

The market is not as liquid as the stock market.

The risk of bond investment could be as much as

equity investment.

8

Characteristics of bonds and

other fixed income securities

9

By type

Bonds

Basic characteristics: terms to maturity, coupon

rate, and face (par) value.

Bondholders usually receive half of the annual

coupon every six months.

10

By type

Preferred stocks

Pay preferred stock dividends unless the company

does not make enough earnings to do so.

Do not have a stated maturity date.

11

By type

Mortgage-backed securities (MBS)

Use a pool of mortgages as collateral.

The mortgage interest generated from the

mortgages is used to pay for the monthly coupon

interest to MBS owners.

12

By rating

Investment grade vs. speculative grade

Government bond: sovereignty risk rating

13

14

Source: Bodie, Kane, and Marcus 2010, Figure 10.8, p. 309

By special provisions

Senior vs. subordinated bonds

Straight vs. convertible bonds

Straight vs. callable bonds

Coupon vs. zero coupon bonds

15

By maturity

Maturity: 1 year or less

marketable securities

Maturity: more than a year but less than 10

notes

Maturity: 10 or more years

bonds

16

Bond quotations

17

Issuer Name Coupon Maturity Rating

Moody's/S&P

High Low Last Change Yield %

MORGAN

STANLEY

5.300% Mar 2013 A2/A 107.228 105.857 106.474 0.015 2.261

CITIGROUP 4.750% May 2015 A3/A 104.446 103.335 103.528 -0.097 3.872

BANK OF AMERICA

CORP

5.625% Jul 2020 A2/A 100.750 97.185 97.347 -0.616 5.994

GENERAL

ELECTRIC CAPITAL

CORP

4.375% Sep 2020 Aa2/AA+ 98.580 95.000 95.846 -0.154 4.916

VALE OVERSEAS 6.875% Nov 2036 Baa2/BBB+ 109.000 107.460 107.560 -1.661 6.280

NEWMONT

MINING CORP

5.125% Oct 2019 Baa1/BBB+ 108.095 106.214 107.214 -0.059 4.136

MORGAN

STANLEY

7.300% May 2019 A2/A 112.373 108.829 109.720 -1.158 5.819

TOTAL CAPITAL SA 2.300% Mar 2016 Aa1/AA 98.000 96.686 96.686 -0.444 2.988

SEAGATE

TECHNOLOGY HDD

HLDG

6.800% Oct 2016 Ba1/BB+ 101.295 100.188 100.500 1.350 6.691

Source: The Wall Street Journal (Dec 15 2010) http://online.wsj.com/mdc/public/page/2_3027-

corpbond.html?mod=topnav_2_3050 (accessed on December 16, 2010)

Quotations of corporate bonds in WSJ.com

Fixed income securities markets

in Hong Kong

18

Short-term money markets

The HIBOR market is basically a short-term

money market for banks dealing in the local

currency.

HIBOR represents the cost of short-term funds

in Hong Kong.

19

Long-term debt market

Government sector is more mature than

corporate sector.

The trading of Exchange Fund bills and notes is

now the most liquid government sector market in

Asia.

Hong Kong Monetary Authority (HKMA) has been

actively involved in the development of the debt

market through improving market infrastructure

and promoting the issue of high-quality debt

instruments.

20

Long-term debt market

For corporate sector, corporations usually issue

debt in the form of convertible bonds or

convertible preferred stocks.

Some companies have issued Eurobonds, Yankee

bonds in the US, or raised funds through

international syndicates.

21

Public debt

Exchange Fund Bills and Notes are the most

actively traded instruments.

To manage liquidity as well as discount them

at the HKMAs Discount Window.

22

Private debt

Commercial paper

Negotiable certificates of deposit (NCDs)

issued by banks for terms of up to three years to

finance high-cost projects.

Corporate bonds

Dragon bonds

Eurobonds

23

The Hong Kong Mortgage Corporation

Purchase portfolios of mortgages or other loans.

Raise financing for its purchase of mortgages

through the issuance of debt securities in capital

markets.

Secure mortgage portfolio by way of issuing

mortgage-backed securities to investors.

24

Return and risk of fixed income

securities

25

Measures of return and risk

26

t period during i bond on accrued or paid interest the

t period of beginning at the i bond of price market the

t period of end at the i bond of price market the

t period during i bond for return period holding the

where

,

,

1 ,

,

,

, , 1 ,

,

=

=

=

=

+

=

+

+

t i

t i

t i

t i

t i

t i t i t i

t i

Int

P

P

HPR

P

P Int P

HPR

Suppose an investor bought a 5-year bond with

8% coupon last year. The face value of the bond

is $1,000. He paid $1,010 for the bond. A year

later, he decided to sell the bond and collected

$1,020. He also received $80 coupon interest

(8%*$1,000). What is his HPR?

27

% 91 . 8

010 , 1 $

010 , 1 $ 80 $ 020 , 1 $

=

+

= HPR

Historical risk and return of bonds among

Asian countries

28

Country

Monthly average (%) Standard deviation (%)

China

0.31 1.03

Hong Kong

0.44 1.05

Indonesia

1.45 3.96

South Korea

0.48 1.00

Malaysia

0.37 0.78

The Philippines

0.97 1.96

Singapore

0.34 1.07

Thailand

0.48 1.91

Source: Asian Bonds Online (2009) http://asianbondsonline.adb.org/spreadsheets/RG-

Asian_Local_bond_RI.xls (accessed on December 16, 2010)

Bond returns among selected Asian countries from Jan 2001 to Sep 2009

Valuation of bonds

29

Basic pricing model

where

P

m

= the current market price of the bond

n = the number of years to maturity

t = timing of each coupon payment

C

i

= the annual coupon payment for bond i

r = the prevailing annual yield to maturity for this bond issue (or the

required annual rate of return for this bond)

P

p

= the par value of the bond.

30

n 2

p

n 2

1 t

t

i

m

)

2

r

1 (

P

)

2

r

1 (

2 / C

P

+

+

(

(

(

+

=

=

A bond with an 8% coupon that pays interest

semiannually, has a par value of $1,000, matures

in seven years, and for which investors believe

that a 6% semiannual interest rate (12% required

rate of return annually) should be required. What

is the bond price?

31

The PV of coupons

= $40 * [(1 - 1/(1.06)

14

)/0.06] = $371.80

The PV of par value

= $1,000 * [1/(1.06)

14

] = $442.30

Bond price

= $371.80 + $442.30 = $814.10

A bond with an 8% coupon that pays interest

annually, has a par value of $1,000, matures in

seven years, and for which investors believe that

a 12% annual interest rate (12% required rate of

return annually) should be required. What is the

bond price?

32

The PV of coupons

= $80 * [(1 - 1/(1.12)

7

)/0.12] = $365.10

The PV of par value

= $1,000 * [1/(1.12)

7

] = $452.35

Bond price

= $371.80 + $442.30 = $817.45

Suppose that a zero coupon bond matures ten

years from now and has a maturity value of

$1,000. Assuming that a return of 10% (5%

semiannually) is required by investors. What is

the bond price?

33

Bond price

= $1,000 * [1/(1.05)

20

] = $376.89

Bond pricing between coupon dates

34

What is the price of a bond with a 6% coupon

bond, 4.75 years remaining to maturity, and a

yield to maturity of 5%? The bond has a par

value of $1,000 and pays coupons

semiannually.

Step 1: Calculate the bond price by round up

the maturity to a whole number.

35

76 . 043 , 1

%) 5 . 2 1 (

000 , 1

%) 5 . 2 1 (

30

10

10

1

0

=

+

+

(

+

=

= t

t

P

Step 2: Make adjustment to the answer in Step 1.

The bond price in Step 1 is 0.25 years more than it

supposed to be, i.e., we take 0.25 year more in the

discounting process.

The correct bond price should be the future value of

the answer in Step 1 for 0.25 year more.

36

57 . 056 , 1

0123 . 1 76 . 043 , 1 %) 5 1 (

25 . 0

0 25 . 0

=

= + = P P

White, Mark A. and Janet M. Todd, 1995. Bond pricing between coupon payment dates

using a no-frills financial calculator. Financial Practice & Education, Vol. 5 Issue 1,

148-152.

Self-test

Calculate the price of a bond with an 8%

coupon bond, exactly 7.25 years remaining to

maturity and a yield to maturity of 6%. The

bond has a par value of $1,000 and pays

coupons semiannually.

37

Bond yields

Yield to maturity

Current yield

38

39

Assume that you purchased an 8%, 20-year,

$1,000 par, semiannual payment bond priced

at $1,012.50. What is the yield to maturity

when the bond has 12 years remaining until

maturity?

Factors affecting the price of a bond

From the basic pricing model, r and n affect

bond price.

Then what will affect r?

40

Page 41

How n affects bond price?

r = coupon rate Market value = Par value Sell at par Par Bond

r < coupon rate

r > coupon rate Market value < Par value Sell below par

Discount

bond

Market value > Par value Sell above par

Premium

Bond

Page 42

Year r = 10% r = 15% r = 20%

0 $1,380.30 $1,000.00 $766.23

1 $1,368.33 $1,000.00 $769.47

2 $1,355.17 $1,000.00 $773.37

3 $1,340.68 $1,000.00 $778.04

4 $1,324.75 $1,000.00 $783.65

5 $1,307.23 $1,000.00 $790.38

6 $1,287.95 $1,000.00 $798.45

7 $1,266.75 $1,000.00 $808.14

8 $1,243.42 $1,000.00 $819.77

9 $1,217.76 $1,000.00 $833.72

10 $1,189.54 $1,000.00 $850.47

11 $1,158.49 $1,000.00 $870.56

12 $1,124.34 $1,000.00 $894.68

13 $1,086.78 $1,000.00 $923.61

14 $1,045.45 $1,000.00 $958.33

15 $1,000.00 $1,000.00 $1,000.00

Changes in Bond Value over Time

Value of a 15-years, 15% coupon, $1000 par value bond over time when

interest rates are 10%, 15%, and 20% respectively

Page 43

$0

$250

$500

$750

$1,000

$1,250

$1,500

1 3 5 7 9 11 13 15

r = Coupon Rate

r < Coupon Rate

r > Coupon Rate

Years

Bond Value

Changes in Bond Value over Time

Page 44

Bond Value over time

Example

Suppose you purchased a 15-years $1000 bond with 15%

annual coupon, the required rate is 10%. If the required

return remains as 10% over the bonds life, what is the HPR

for the first year?

Managing bond portfolios

45

Relationship between yield and bond price

46

Source: Bodie, Kane, and Marcus 2010, Figure 11.1, p.331.

Relationship between yield and bond price

Inverse relationship between bond price and

interest rates (or yields).

Long-term bonds are more price sensitive

than short-term bonds.

Low coupon bonds are more price sensitive

than high coupon bonds.

Sensitivity of bond prices to changes in yields

increases at a decreasing rate as maturity

increases.

47

Relationship between yield and bond price

Bond price volatility is inversely related to

coupon.

Bond price volatility is greater when the yield-

to-maturity is low than when the yield-to-

maturity is high.

An increase in a bonds yield to maturity

results in a smaller price decline than the gain

associated with a decrease in yield

(asymmetrical changes).

48

Relationship between yield and bond price

Expect a major decline in interest rates

Hold bonds with maximum interest rate sensitivity

Expect an increase in market interest rates

Hold bonds with minimum interest rate sensitivity

49

Self-test

As the portfolio manager for a large pension fund,

you are considering the following bonds:

50

Assuming that you expect a decline in interest

rates soon, identify and justify which of the

bonds you would select. Justify your answer

without actually doing the calculations.

Bond Coupon Maturity Price (% of

$1,000)

YTM

X (new issue) 14% 2014 101.75 13.75%

Y (new issue) 6% 2014 48.125 13.60%

Z (1974) 6% 2014 48.875 13.40%

Reinvestment risk

Reinvestment risk

The risk that the investor will not be able to

reinvest the coupons at the promised yield rate.

Short-term bonds have more reinvestment rate

risk than long-term bonds

High coupon rate bonds have more reinvestment

rate risk than low coupon rate bonds

51

52

Consider a new bond issue of 6-year maturity, 8%

annual coupon (pay coupon interest once a year),

a face value of $1,000, and where the market

interest rate for a similar bond is 8%. Hence, the

current bond price is $1,000. An investor bought

the new bond issue for $1,000. For simplicity, let

us assume that there is a one time market

interest rate hike from 8% to 9% and the 9%

market interest rate remains the same for all six

years.

53

14 . 955 $

09 . 1

000 , 1 $

0.09

) 09 . 1 / 1 $80(1

hike rate after the price Bond

6

6

= +

=

Coupon

payment no.

Years remaining

for reinvestment

Value of $80 at the

end of 6

th

year (at 9%)

Value of $80 at the

end of 6

th

year (at 8%)

1 5 $80*(1+9%)

5

$80*(1+8%)

5

2 4 $80*(1+9%)

4

$80*(1+8%)

4

3 3 $80*(1+9%)

3

$80*(1+8%)

3

4 2 $80*(1+9%)

2

$80*(1+8%)

2

5 1 $80*(1+9%)

1

$80*(1+8%)

1

6 0 $80 $80

Total $601.87 $586.87

Coupon reinvestment:

Computing duration

Duration or Macaulay duration

The weighted average of the times until the cash

flows of a fixed income security are received

A measure to summarize the interest rate risk of

bonds

54

price bond

) 1 /(

1

t

t

t

n

t

t

y CF

w

w t D

+

=

=

=

Computing duration

Modified duration (D

m

)

55

y

D

D

m

+

=

1

56

Year (t) Cash flow (C

t

) PV of CF

t

at 10%

[C

t

/(1+y)

t

]

PV of CF

t

* timing of

each cash flow

1 $100 $90.91 90.91*1 = 90.91

2 $100 $82.64 82.64*2 = 165.28

3 $100 $75.13 75.13*3 = 225.39

4 $100 $68.30 68.30*4 = 273.20

5 $100 $62.09 62.09*5 = 310.50

6 $100 $56.45 56.45*6 = 338.70

7 $1,100 $564.47 564.47*7 = 3,951.29

Total $1,000 5,355.27

Let us compute the Macaulay and modified durations of a 7-

year par value bond that has a coupon rate of 10%, assuming

annual coupon. The yield to maturity is 10%.

57

years 87 . 4

0.1) (1

years 5.36

Duration Modified

years 36 . 5

1,000

5,355.57

Duration Macaulay

=

+

=

= =

Characteristics of duration

The duration of a zero coupon bond will equal

its term to maturity.

The Macaulay duration of a bond with coupon

payments will always be less than its term to

maturity.

There is an inverse relationship between

coupon and duration.

Duration is additive: the duration of a

portfolio of securities is the weighted-average

of the durations of the individual securities.

58

Characteristics of duration

Term to maturity and duration are generally

positively related, but duration increases at a

decreasing rate with maturity.

There is an inverse relationship between yield

to maturity and duration.

Call provisions can have a dramatic effect on a

bonds duration.

59

Self-test

Compute the Macaulay and modified

durations of a 7-year par value bond that has

a coupon rate of 10%, assuming semiannual

coupon. The yield to maturity is 10%.

60

Duration and immunization of a bond

portfolio

Duration can be used to insulate bonds from

interest rate risk.

Immunization refers to a strategy of shielding

off interest rate risk of a bond or a bond

portfolio.

Work if the Macaulay duration of the bond (or a

bond portfolio) is the same as the desired holding

period.

61

An insurance company needs to pay out $1,469 in five

years. The chief investment officer of the company

wants to make a bond investment today so that it can

meet the $1,469 future cash outflow five years later.

The officer wants to shield off any interest rate risk.

That is, the money set aside today for the bond must

be sure to meet the $1,469 future cash outflows.

He is considering a new bond issue of 6-year maturity,

8% annual coupon (coupon interest once a year) and a

face value of $1,000. The market interest rate for a

similar bond is 8%. Because the yield and the required

rate of return are the same, the current bond price is

$1,000. He is confident that the bond will meet his

criteria. Why?

62

63

Scenario 1: No change in interest rate

Coupon

payment no.

Years remaining

for reinvestment

Value of each year CF at the end of 5

th

year (at 8%)

1 4 $80*(1+8%)

4

= 108.84

2 3 $80*(1+8%)

3

= 100.78

3 2 $80*(1+8%)

2

= 93.31

4 1 $80*(1+8%)

1

= 86.40

5 0 $80

Sale of the

bond

0 $1,080/1.08 = $1,000

Total $1,469.33

The bond meets the insurance companys cash

outflow obligation.

64

Scenario 2: Interest rate drops from 8% to 7%

Coupon

payment no.

Years remaining

for reinvestment

Value of each year CF at the end of 5

th

year (at 7%)

1 4 $80*(1+7%)

4

= 104.86

2 3 $80*(1+7%)

3

= 98.00

3 2 $80*(1+7%)

2

= 91.59

4 1 $80*(1+7%)

1

= 85.60

5 0 $80

Sale of the

bond

0 $1,080/1.07 = $1,009.35

Total $1,469.40

The bond meets the insurance companys cash

outflow obligation.

65

Coupon

payment no.

Years remaining

for reinvestment

Value of each year CF at the end of 5

th

year (at 8%)

1 4 $80*(1+9%)

4

= 112.93

2 3 $80*(1+9%)

3

= 103.60

3 2 $80*(1+9%)

2

= 95.05

4 1 $80*(1+9%)

1

= 87.20

5 0 $80

Sale of the

bond

0 $1,080/1.09 = $990.83

Total $1,469.61

Scenario 3: Interest rate increases from 8% to 9%

The bond meets the insurance companys cash

outflow obligation.

What is the

magic here?

Self-test

An insurance company must make a payment of $2,158,925 in

10 years. The market interest rate is 8%. Hence, the present

value of the obligation is $1,000,000. The treasurer of the

company wants to fund the obligation today with two coupon

bonds below:

66

Bond A Bond B

Years of maturity 15 20

Coupon 8% 8%

Par value $1,000 $1,000

Coupon payment time Once a year Once a year

Bond price today $1,000 $1,000

Macaulay duration 9.24 10.60

Self-test

67

Explain how the treasurer is able to use Bonds A and B to fund

his companys obligation in ten years without interest rate risk.

Calculate the portfolio composition of the two bonds.

Calculate the number of Bonds A and B that should be

purchased in order to fund the obligation.

Modified duration and bond price volatility

Bond price movements vary proportionally to

modified duration for small changes in yields.

68

Proof (page 60 of Investment Science, David Luenberger)

where

P = the change in price for the bond

P = the beginning price for the bond

D

m

= the modified duration of the bond

y = the yield change in basis point divided by 100.

E.g., if interest rate hikes from 8.00% to 8.50%, y = 0.50%

y D

m

A = 100

P

P

A bond with maturity of 30 years has a

coupon rate of 8% (paid annually) and a yield

to maturity of 9%. Its price is $897.26, and its

modified duration is 11.37 years. What will

happen to the bond price if the bonds yield to

maturity increases to 9.01% and 10%?

69

70

896.324 $ P

$0.9359 - 897.26 $ P

-0.9359 P

01 . 0

09 . 1

37 . 11

100

897.26

P

100

P

P

=

=

=

=

A = y D

m

r=9% to r=9.01%

803.6651 $ P

$93.5949 - 897.26 $ P

-9.359 P

1

09 . 1

37 . 11

100

897.26

P

100

P

P

=

=

=

=

A = y D

m

r=9% to r=10%

Actual Price = $896.328 Actual Price = $811.46

Self-test

A bond with maturity of 25 years has a

coupon rate of 10% (paid semiannually) and a

yield to maturity of 9%. Its price is $1,098.81,

and its modified duration is 9.61 years. What

will happen to the bond price if the bonds

yield to maturity decreases to 8.5%?

71

Major limitations of duration

Accurate only when the yield change is very

small.

Applicable when the yield curve experiences a

parallel shift.

Applicable to straight bond only.

When using duration in immunization, we may

need to make frequent changes to the bond

portfolio if there are many changes in market

interest rates.

72

Bond convexity

Duration is only an approximation.

Duration asserts that the percentage price

change is linearly related to the change in the

bonds yield.

Underestimates the increase in bond prices when

yield falls.

Overestimates the decline in price when the yield

rises.

73

Pricing Error Due to Convexity

74

Source: Bodie, Kane, and Marcus 2010, Figure 11.5, p.345.

Computation of convexity

75

| |

2

2 / 1 y Convexity y D

P

P

A + A =

A

=

(

+

+ +

=

n

1 t

2

t

t

2

) t t (

) y 1 (

CF

) y 1 ( P

1

Convexity

Where: CF

t

is the cash flow (interest and/or principal) at time

t and y = YTM

The prediction model including convexity is:

Proof (page 66 of Investment Science, David Luenberger)

A 10-year bond has 3% annual coupon, 4.5%

yield to maturity, $1,000 par value, and a

bond price of $881.3. What is the convexity of

the bond?

76

77

Time (t) CF PV(CF) at 4.5% t+t

2

(t+t

2

)*PV(CF)

1 30 28.7081 2 57.4163

2 30 27.4719 6 164.8314

3 30 26.2889 12 315.4668

4 30 25.1568 20 503.1368

5 30 24.0735 30 722.2059

6 30 23.0369 42 967.5486

7 30 22.0449 56 1234.5118

8 30 21.0956 72 1518.8799

9 30 20.1871 90 1816.8420

10 1030 663.2455 110 72,957.0064

Total 881.3092 80,257.8458

3924 . 83

045 . 1 3092 . 881

8458 . 80257

2

=

= Convexity

If the change in yield in 25 basis points

(0.25%), the price change due to convexity of

the bond:

78

2

Convexity Price 2 / 1

convexity to due change Price

y A =

23 . 0 $

) 0025 . 0 ( 3924 . 83 3092 . 881 2 / 1

2

=

=

Determinants of convexity

Price-yield curve is more convex at its lower-

yield (upper left) segment.

Inverse relationship between coupon and

convexity (holding yield and maturity constant).

Direct relationship between maturity and

convexity (holding yield and coupon constant).

Inverse relationship between yield and convexity

(holding coupon and maturity constant).

Is convexity good to investors?

79

Self-Test

A 7-year bond has a 10% annual coupon, 10%

yield to maturity, a $1,000 par value, a bond price

of $1,000, and a modified duration of 4.87 years.

Calculate the convexity of the bond.

Calculate the price change on the bond due to

convexity for a 75 basis point decline in the market

yield.

Calculate the combined effect on the bond price

changes due to modified duration and convexity for a

75 basis point drop in the market yield.

80

Bond dedication strategy: Using zero

coupon bonds to achieve a future goal

We would like to have a 30% down payment on a

house valued at $2,000,000 today with a 3%

inflation rate in 8 years. Based on the time value

of money calculation, the target financial goal =

$2,000,000*30%*(1+3%)

8

= $760,000.

The bond yield for a government (or high quality)

zero coupon bond is 8% with a term to maturity

of 8 years. The market price for this zero coupon

bond is $540.27 by taking the PV of $1,000 at an

8% annual rate [i.e. $1,000/(1+8%)

8

].

81

Bond dedication strategy: Using zero

coupon bonds to achieve a future goal

We need 760 zero coupon bonds so that the

matured value of these 760 bonds will be

$760,000.

The amount of money needed to invest today

is $410,605.2 [i.e., 760$540.27].

82

Bond dedication strategy

## Viel mehr als nur Dokumente.

Entdecken, was Scribd alles zu bieten hat, inklusive Bücher und Hörbücher von großen Verlagen.

Jederzeit kündbar.