Va|uat|on

VALUING 8CNDS
8Cnu CPA8AC1L8lS1lCS
W Coupon Lhe lnLeresL paymenLs pald Lo Lhe
bond holder
W lace value paymenL aL Lhe maLurlLy of Lhe
bond Also called parvalue or maLurlLy value
W Coupon raLe ls Lhe annual coupon expressed
as a fracLlon of Lhe bond's face value
or
W annual lnLeresL paymenL as a percenLage of
face value
Lxample 1
W A bond have face value $1000 and coupon
raLe 6 lssue currenL year wlll maLure afLer 3
year Lhen followlng ls cash flow scheme
$60 $60
$1000
$1060
lsL year
2
nd
year
3
rd
year
4
Lh
year
8ond prlce and bond yleld
W CalculaLlng presenL value of example 1 ln order Lo
flnd how much you would be pay for Lhls sLream
of cash flow Assumlng Lhe lnLeresL raLe ls 36
v $60 + $60 + $1060
(1+r) (1+r)
2
(1+r)
3
v $60 + $60 + $1060
(1+036) (1+036)
2
(1+036)
3
v $101077
8ond prlce and bond yleld
W 8ond prlce are usually expressed as a percenLage
of Lhelr face value
W SC 6 bonds of example1 ls worLh 101077 of
face value
W 8ond prlce formula
v v (coupon) + v (face value)
v v ( coupon* annulLy facLor) + v ( face
value* dlscounL facLor)
racLlce
W CalculaLe Lhe presenL value of 6year bond
wlLh 9 coupon 1he lnLeresL raLe ls 12 lace
value of bonds ls $1000
W CalculaLe lL seml annually?
W CalculaLe lL when lnLeresL raLe ls 13?
W Concluslon ????????
8ond prlce and bond yleld
W Concluslon
1 when markeL lnLeresL raLe exceeds
Lhe coupon raLe bonds sell for less Lhan face
value
2 when Lhe markeL lnLeresL raLe ls
below Lhe coupon raLe bond sell for more
Lhan face value
8ond yleld
8ond yleld
?leld ls a flgure LhaL shows Lhe reLurn you geL on a
bond"
?leld Lo maLurlLy versus currenL yleld
W ?leld Lo CurrenL
1he currenL yleld ls Lhe annual coupon paymenL
expressed as a fracLlon of Lhe bond prlce"
W ?leld Lo MaLurlLy
Lhe yleld Lo maLurlLy measure Lhe average raLe of
reLurn Lo an lnvesLor who purchased Lhe bond and holds lL
unLll maLurlLy"
CurrenL yleld
cash pald Lo you ln year
?ou ay 1 2 3 raLe of reLurn
$1000 $100 $100 $1100 ?
raLe of reLurn 1cash ouL flow(coupon paymenL)
face value of bond/bond prlce
cash pald Lo you ln year
?ou ay 1 2 3 raLe of reLurn
$113616 $100 $100 $1100 ?
CurrenL yleld
W 8aLe of reLurn calculaLlng by dlvldlng annual
coupon paymenL by bond prlce ls called
currenL yleld
?leld 1o MaLurlLy
W ?leld Lo maLurlLy ls lnLeresL raLe for whlch Lhe
presenL value of Lhe bond's paymenL equal Lhe
prlce Cr
W dlscounL raLe LhaL makes Lhe presenL value
of Lhe bond's paymenL equal Lo lLs prlce"
W v
aL 10
$100 + $100 + $1100
(1+10) (1+10)
2
(1+10)
3
v
aL 10
100000
?leld 1o MaLurlLy
W v
aL 10
$100 + $100 + $1100
(1+10) (1+10)
2
(1+10)
3
v
aL 10
100000
W v
aL 13
$100 + $100 + $1100
(1+13) (1+13)
2
(1+13)
3
v
aL 10
88384
W v
aL 3
$100 + $100 + $1100
(1+03) (1+03)
2
(1+03)
3
v
aL 3
$113616
?leld 1o MaLurlLy
W MaLurlLy yleld of 113616 ls 3 buL lLs currenL yleld ls 88
W CurrenL yleld focuses on only currenL lncome and lgnores
prospecLlve prlce lncrease or decrease Lherefore currenL yleld
mlsmeasures Lhe bond's LoLal raLe of lnLeresL CurrenL yleld
oversLaLes Lhe reLurn of premlum bond and undersLaLes LhaL of
dlscounL bonds
W A bond LhaL ls prlced above lLs value ls sald Lo sell aL premlum So
lnvesLor buy bond aL premlum prlce caplLal loss over Lhe perlod of
llfe So Lhe reLurn on premlum bond ls always less Lhan currenL
yleld
W A bond LhaL ls prlced below lLs face valued ls sald Lo be sell aL
dlscounL So lnvesLor collecL caplLal galn over Lhe llfe of Lhe bond
So Lhe reLurn on dlscounL bond ls always greaLer Lhan currenL yleld
racLlce
W A 4year maLurlLy bond wlLh a 14 presenL
coupon raLe can be boughL for $1200 whaL ls
yleld of maLurlLy?
8aLe of reLurn
W 8aLe of reLurn ls LoLal lncome per perlod per
dollar lnvesLed
raLe of reLurncoupon lncome +prlce changes
lnvesLmenL