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30 Cards in this Set

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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.

Coupon $80 a year, $40 a month.

accrued interest= $40*(30/182)=$6.59

Invoice Price= $990+$6.59=$996.59

Types of Corporate Bonds

Callable Bonds- Can be repurchased before the maturity date

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

Formula for Accrued Interest and def

=(Annual Coupon Payment/2)*(Days since last coup pmt/days seper coup pmt)

the amount of coup int earned since last payment that an investor must compensate a seller for

Treasury Inflation Protected Security- Indexed Bonds

The par value of the bond each year is adjusted for that years inflation prior to determining that years coupon payment

Year 1 inflation= 2%. So adjust par value of $1000 to 1020. Then take 4% coupon payment which is $40.80 instead of $40

Real Return and Nominal Return: Equations

Nominal= (Interest + Price Appreciation)/Initial.P

Real=((1+Nom. Return) / (1+inflation))-1

Bond Value equation

= PV of Coupons + PV value of Par Value

=Coup / ((1+r)^t)+ Par Value / ((1+r)^t)

Current price on a zero coupon bond- equation
PV= value at maturity/ (1+int.rate)^n
Invoice Price- equation

=Flat price+ Accrued Interest

How is interest rate interpreted in terms of a Bonds Maturity?

Interest rates is often interpreted as a measure of the average rate of return that will be earned on a bond if it is bought now and held until maturity

Current Yield: equation and definition

=annual coupon payment/ bond price

relates the annual coupon interest to the market price. Ignores time value of money

Imputed interest

imputed interest 2nd year= current price of 2 year- current price of 1 year
Solve: 100:08


= 100(8/32)>>> 8/32=.25


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.




What is the yield on any investment equal to?

The interest rate that will make the present value of the cash flows from the investment equal to the price/cost of the investment.

P= (CF1/1+y) + (CF2/(1+y)^2.......

Suppose an 8% coupon, 30 year bond is selling for $1,276.76, What is the average rate of return?

N= 60

I/Y=_____ 3.0

PV= -1276.76

PMT= 40

FV= 1000

Annualizing Yields

YTM annualized as an APR which is equated by using YTM= Periodic Interest Rate * m

Determine effective annual yield, which accounts for compounding--- e.a.y=((1+periodic interest rate)^m)-1

Relationship of coupon rates, current yields, YTM in terms of premium and discount bonds

Premium Bonds: Coupon Rate> Current Yield> YTM

Discount Bonds: Coupon Rate< Current Yield < YTM

Yield to Call

YTM calculated on the assump. bond will be held till maturity.
What is a straight bond

A non callable bond

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
Realized Compound Yield vs YTM

YTM- average return if the bond is held to


- 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

Realized Compound Yield: Equation and what other measure is it similar to


Holding Period Return

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

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.

YTM= 9.88

RCY=9.99- hint* need to find new fv, think of the coup pmts and int rates.

After tax Return equation
(income before taxes- after tax return)/Current Price

Reminder- before tax return is just the HPR for that period

Imputed Interest


What are the determinants of bond safety?

Coverage Ratios

Leverage Ratios, Debt-to-equity ratio

Liquidity Ratios

Profitability Ratios

Cash flow-to-debt ratio

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=10 i/y=--3.3679Pv=1124.72PMT=40FV=1100


What is the graphical depiction of the relationship between the spot rate and maturity.

Spot Rate Curve or Pure Yield Curve
What are future expected spot rates called`

Forward Rates