Seu SlideShare está sendo baixado. ×

# Bonds.ppt

Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Anúncio
Próximos SlideShares
BONDS
Carregando em…3
×

1 de 18 Anúncio

# Bonds.ppt

Financial Management Bonds

Financial Management Bonds

Anúncio
Anúncio

Anúncio

### Bonds.ppt

1. 1. 1 - 1 Lecture 7 Bonds and Valuation  Par or Face Value - • The amount of money that is paid to the bondholders at maturity. For most bonds this amount is \$1,000. It also generally represents the amount of money borrowed by the bond issuer.  Coupon Rate - • The coupon rate, which is generally fixed, determines the periodic coupon or interest payments. It is expressed as a percentage of the bond's face value. It also represents the interest cost of the bond to the issuer.
2. 2. 1 - 2 2 Definitions  Coupon Payments - • The coupon payments represent the periodic interest payments from the bond issuer to the bondholder. The annual coupon payment is calculated by multiplying the coupon rate by the bond's face value. Since most bonds pay interest semiannually, generally one half of the annual coupon is paid to the bondholders every six months.  Maturity Date - • The maturity date represents the date on which the bond matures, i.e., the date on which the face value is repaid. The last coupon payment is also paid on the maturity date.
3. 3. 1 - 3 3 Definitions  Call Price - • The amount of money the issuer has to pay to call a callable bond (there is a premium for calling the bond early). When a bond first becomes callable, i.e., on the call date, the call price is often set to equal the face value plus one year's interest.  Required Return - • The rate of return that investors currently require on a bond.
4. 4. 1 - 4 4 Definitions  Yield to Maturity - • The rate of return that an investor would earn if he bought the bond at its current market price and held it until maturity. Alternatively, it represents the discount rate which equates the discounted value of a bond's future cash flows to its current market price.  Yield to Call - • The rate of return that an investor would earn if he bought a callable bond at its current market price and held it until the call date given that the bond was called on the call date.
5. 5. 1 - 5 Bond markets  Primarily traded in the over-the-counter (OTC) market.  Most bonds are owned by and traded among large financial institutions.  Just like the PSX bonds are traded and profit loss at the market price.
6. 6. 1 - 6 Key Features of a Bond  Par value – face amount of the bond, which is paid at maturity (assume \$1,000).  Coupon interest rate – stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest.  Maturity date – years until the bond must be repaid.  Issue date – when the bond was issued.  Yield to maturity - rate of return earned on a bond held until maturity (also called the “promised yield”).
7. 7. 1 - 7 Effect of a call provision Allows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor). Borrowers are willing to pay a higher interest rate, and lenders/investors require a higher rate, for callable bonds. Most bonds have a deferred call and a declining call premium.
8. 8. 1 - 8 What is a sinking fund? Provision to pay off a loan over its life rather than all at maturity. Similar to amortization on a term loan. Reduces risk to investor, shortens average maturity. But not good for investors if rates decline after issuance.
9. 9. 1 - 9 The value of financial assets N N 2 2 1 1 r) (1 CF ... r) (1 CF r) (1 CF Value        0 1 2 N r% CF1 CFN CF2 Value ...
10. 10. 1 - 10
11. 11. 1 - 11 Changes in Bond Value over Time  What would happen to the value of these three bonds if its required rate of return remained at 10%: Years to Maturity 1,184 1,000 816 10 5 0 13% coupon rate 7% coupon rate 10% coupon rate. VB
12. 12. 1 - 12 Bond values over time  At maturity, the value of any bond must equal its par value.  If rd remains constant:  The value of a premium bond would decrease over time, until it reached \$1,000.  The value of a discount bond would increase over time, until it reached \$1,000.  A value of a par bond stays at \$1,000.
13. 13. 1 - 13 An example: Current and capital gains yield Find the current yield and the capital gains yield for a 10-year, 9% annual coupon bond that sells for \$887, and has a face value of \$1,000. Current yield = \$90 / \$887 = 0.1015 = 10.15%
14. 14. 1 - 14 Semiannual bonds 1. Multiply years by 2 : number of periods = 2N. 2. Divide nominal rate by 2 : periodic rate (I/YR) = rd / 2. 3. Divide annual coupon by 2 : PMT = ann cpn / 2. INPUTS OUTPUT N I/YR PMT PV FV 2N rd / 2 cpn / 2 OK OK
15. 15. 1 - 15 What is the value of a 10-year, 10% semiannual coupon bond, if rd = 13%? 1. Multiply years by 2 : N = 2 * 10 = 20. 2. Divide nominal rate by 2 : I/YR = 13 / 2 = 6.5. 3. Divide annual coupon by 2 : PMT = 100 / 2 = 50. INPUTS OUTPUT N I/YR PMT PV FV 20 6.5 50 1000 - 834.72
16. 16. 1 - 16 Default risk If an issuer defaults, investors receive less than the promised return. Therefore, the expected return on corporate and municipal bonds is less than the promised return. Influenced by the issuer’s financial strength and the terms of the bond contract.
17. 17. 1 - 17 Types of bonds Mortgage bonds Debentures Subordinated debentures Investment-grade bonds Junk bonds
18. 18. 1 - 18 Evaluating default risk: Bond ratings  Bond ratings are designed to reflect the probability of a bond issue going into default. Investment Grade Junk Bonds Moody’s Aaa Aa A Baa Ba B Caa C S & P AAA AA A BBB BB B CCC C