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30 Cards in this Set
- Front
- Back
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Accrued interest question: Bond with a coupon rate of 8%, and its been 30 days since last coup pmt. What is the invoice price if the bond is quoted at $990.
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Coupon $80 a year, $40 a month. accrued interest= $40*(30/182)=$6.59 Invoice Price= $990+$6.59=$996.59 |
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Types of Corporate Bonds
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Convertible Bonds- Can be exchanged for shares of the firms common stock Puttable Bonds- Give the holder an option to retire or extend the bond Floating-rate Bonds- Have adjustable coupon rate |
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Formula for Accrued Interest and def
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the amount of coup int earned since last payment that an investor must compensate a seller for |
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Treasury Inflation Protected Security- Indexed Bonds
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Year 1 inflation= 2%. So adjust par value of $1000 to 1020. Then take 4% coupon payment which is $40.80 instead of $40 |
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Real Return and Nominal Return: Equations
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Real=((1+Nom. Return) / (1+inflation))-1 |
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Bond Value equation
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=Coup / ((1+r)^t)+ Par Value / ((1+r)^t) |
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Current price on a zero coupon bond- equation
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PV= value at maturity/ (1+int.rate)^n
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Invoice Price- equation
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How is interest rate interpreted in terms of a Bonds Maturity?
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Current Yield: equation and definition
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=annual coupon payment/ bond price relates the annual coupon interest to the market price. Ignores time value of money |
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Imputed interest
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imputed interest 2nd year= current price of 2 year- current price of 1 year |
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Solve: 100:08
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1.a = 100(8/32)>>> 8/32=.25 =1002.5 |
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A government bond with a coupon rate of 3% makes semiannual coupon payments on January 10 and July 10 of each year. The Wall Street Journal reports the asked price for the bond on January 25 at 100:16. What is the invoice price of the bond? The coupon period has 182 days.
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=100+16/32=100.5 1005+(15*(15/182))= 1006.2 |
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What is the yield on any investment equal to?
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P= (CF1/1+y) + (CF2/(1+y)^2....... |
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Suppose an 8% coupon, 30 year bond is selling for $1,276.76, What is the average rate of return?
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N= 60 I/Y=_____ 3.0 PV= -1276.76 PMT= 40 FV= 1000 |
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Annualizing Yields
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Determine effective annual yield, which accounts for compounding--- e.a.y=((1+periodic interest rate)^m)-1 |
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Relationship of coupon rates, current yields, YTM in terms of premium and discount bonds
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Premium Bonds: Coupon Rate> Current Yield> YTM Discount Bonds: Coupon Rate< Current Yield < YTM |
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Yield to Call
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YTM calculated on the assump. bond will be held till maturity. |
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What is a straight bond
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A non callable bond |
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explain relationships that straight and callable bonds have, in terms of price, when interest rates fluctuate- |
At high interest rates, the risk of call is negligible because the present value of scheduled payments would be less than call price. At lower interest rates you see them diverge, and the callable bonds having their issuers exercise their ability to reclaim the bond at the callable price. With the straight bond it is non callable, so the value will continue to increase as interest rates fall until maturity
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Realized Compound Yield vs YTM
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YTM- average return if the bond is held to maturity - Depends on coup rate, mat., and par val -All are readily observable RCY- ROR over a particular investment period - depends on the bonds price at the end of the holding period, and unknown future value - Can only be forecasted |
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Realized Compound Yield: Equation and what other measure is it similar to
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= Holding Period Return |
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Consider a bond with par $1,000 paying coupon of 5% semi-annually when the market interest rate is only 4% per 6 month. 3 years till maturity. Find the bonds price today, 6 months from now after the next coupon is paid, and the APR. What is the total 6month ROR on the Bond |
PV= 921.37----x 6 month pv= 933.32-----y APR= 8% Reurn= 4%= (25+(y-x))/y |
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Consideran 8% coupon bond selling for $953.10 with 3 years until maturity making annualcoupon payments. The interest rates in the next 3 years will be, withcertainty, r1 =8%, r2 =10%, and r3 =12%. Calculate the yield to maturity and realized compound yield of the bond.
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YTM= 9.88 RCY=9.99- hint* need to find new fv, think of the coup pmts and int rates. |
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After tax Return equation
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(income before taxes- after tax return)/Current Price
Reminder- before tax return is just the HPR for that period |
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Imputed Interest |
=N-O |
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What are the determinants of bond safety? |
Coverage Ratios Leverage Ratios, Debt-to-equity ratio Liquidity Ratios Profitability Ratios Cash flow-to-debt ratio |
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A 30 year maturity, 8% coupon bond paying coupons semi annually is callable in five years at a call price of $1,100. The bond currently sells at a yield to maturity of 7%. Calculate Yield to call? |
N=60i/y=3.5Pv=--1124.72--PMT=40FV=1000 N=10 i/y=--3.3679Pv=1124.72PMT=40FV=1100 YTC=3.3679*2=6.735 |
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What is the graphical depiction of the relationship between the spot rate and maturity.
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Spot Rate Curve or Pure Yield Curve |
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What are future expected spot rates called`
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Forward Rates |
