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1、Chapter 7Interest Rates and Bond Valuation,5/13/2023,甩渠漱长很媳材垮溺慢游铺鞍绚蛊醉巧舱麓谎叛水撼刀哄嘴忌泊矛窒钉向公司理财教学资料 chap007公司理财教学资料 chap007,Chapter Outline,Bonds and Bond ValuationBond FeaturesBond RatingsSome Different Types of BondsBond MarketsInflation and Interest RatesDeterminants of Bond Yields,7-2,5/13/2023,声擒硷航满屡
2、腥奉摆我喇虐抉擦龟鞠天木妊陨锣柯粥括寨迷汉列狼禾硒册公司理财教学资料 chap007公司理财教学资料 chap007,Market Values($Trillion),Value of outstanding issues,5/13/2023,躯漱贼感塘茬伪丰慢括柬顾峻猿核室肉巍扒钉拯痒搞偷缸半凝娟痛慎注垢公司理财教学资料 chap007公司理财教学资料 chap007,Bonds and Bond Valuation,A bond is a legally binding agreement between a borrower and a lender that specifies the
3、:Par(face)valueCoupon rateCoupon paymentMaturity DateThe yield to maturity is the required market interest rate on the bond.Do not confuse the coupon rate with the required market interest rate,擞胆莱胜心道志恨横纵硫佰箭喉胃缠拓惯妻校喳汁绚腥贮始敝许难问择褐公司理财教学资料 chap007公司理财教学资料 chap007,Bond Definitions,BondPar value(face value
4、)Coupon rateCoupon paymentMaturity dateYield or Yield to maturity(required return,market rate),7-5,5/13/2023,即饶池迟欲挝芋魏恶异情盈锨单用触饲衍潦侥鹰困锌蛰臀骇巴钟妓沁隶萄公司理财教学资料 chap007公司理财教学资料 chap007,The Bond-Pricing Equation,Notice that:The first term is the present value of the coupon payments(an annuity);and,The second te
5、rm is the present value of the bonds par value,义衔箔彦耐栽绢就眯既搐倍良箭亦诊锦辅攀勤捎埔粕段倡辐图李嗽茶旭茵公司理财教学资料 chap007公司理财教学资料 chap007,Bond=Present Value of Cash Flows,Bond Value=PV of coupons+PV of parBond Value=PV of annuity+PV of lump sumAs interest rates increase,present values decreaseSo,as interest rates increase,bo
6、nd prices decrease and vice versa,7-7,5/13/2023,浓柑群榨遭握眯恕达隅谩肠门傀款详抒姿搞翌番哎酿讲谣庶脂接桩椎峪湿公司理财教学资料 chap007公司理财教学资料 chap007,Valuing a Discount Bond with Annual Coupons,Consider a bond with a coupon rate of 10%and annual coupons.The par value is$1,000,and the bond has 5 years to maturity.The yield to maturity i
7、s 11%.What is the value of the bond?Using the formula:B=PV of annuity+PV of lump sumB=1001 1/(1.11)5/.11+1,000/(1.11)5B=369.59+593.45=963.04Using the calculator:N=5;I/Y=11;PMT=100;FV=1,000CPT PV=-963.04,7-8,5/13/2023,育娱拇锨枝泼哎跑贝纯俄杏舅猫蛙崭迈兑种蔬悍镑讫霹攘粪辛炸妨困蹄死公司理财教学资料 chap007公司理财教学资料 chap007,Valuing a Premium
8、Bond with Annual Coupons,Suppose you are reviewing a bond that has a 10%annual coupon and a face value of$1000.There are 20 years to maturity,and the yield to maturity is 8%.What is the price of this bond?Using the formula:B=PV of annuity+PV of lump sumB=1001 1/(1.08)20/.08+1000/(1.08)20B=981.81+214
9、.55=1196.36Using the calculator:N=20;I/Y=8;PMT=100;FV=1000CPT PV=-1,196.36,7-9,5/13/2023,淳元英送潘缠絮茁杂履鹿莲支劫顿终凄戏彩藏抒得弧夯荆当菇玉与搭狮践公司理财教学资料 chap007公司理财教学资料 chap007,Graphical Relationship Between Price and Yield-to-maturity(YTM),Bond Price,Yield-to-maturity(YTM),7-10,5/13/2023,孟井虫纪皿替郸腰效弓麻脊嚣净级载啦译森奋踢嗣钱填织百驯缅东蒋浚豆公
10、司理财教学资料 chap007公司理财教学资料 chap007,Bond Prices:Relationship Between Coupon and Yield,If YTM=coupon rate,then par value=bond priceIf YTM coupon rate,then par value bond priceWhy?The discount provides yield above coupon ratePrice below par value,called a discount bondIf YTM coupon rate,then par value bon
11、d priceWhy?Higher coupon rate causes value above parPrice above par value,called a premium bond,7-11,5/13/2023,汁靳筏竭淤狸雏兽敢集妇味坍妊希衡纳浪嘘渗新谭毋纱菱振獭避揩工李玉公司理财教学资料 chap007公司理财教学资料 chap007,The Bond Pricing Equation,7-12,5/13/2023,句惠诺沂幽今茄隆那博称淄块翅刨宁买婴俐识严掷什彬煞泞坞晰完洪蛋踊公司理财教学资料 chap007公司理财教学资料 chap007,Example 7.1 p.196,
12、Coupon rate=14%,semiannual couponsYTM=16%;Maturity=7 yearsPar value=$1,000Find present values based on the payment periodHow many coupon payments are there?What is the semiannual coupon payment?What is the semiannual yield?B=701 1/(1.08)14/.08+1,000/(1.08)14=917.56,7-13,5/13/2023,伊垮缮切宛官凛殉痛本蚕灌带惠汪翅柔戮薪
13、勾剩忽瓢莫咋兵醋该翠摄跌务公司理财教学资料 chap007公司理财教学资料 chap007,Interest Rate Risk,Price RiskChange in price due to changes in interest ratesLong-term bonds have more price risk than short-term bondsLow coupon rate bonds have more price risk than high coupon rate bondsReinvestment Rate RiskUncertainty concerning rate
14、s at which cash flows can be reinvestedShort-term bonds have more reinvestment rate risk than long-term bondsHigh coupon rate bonds have more reinvestment rate risk than low coupon rate bonds,7-14,5/13/2023,握足费可纂圣估殆啦肃爷疲茅俯艘蹭谷叠堕杖寿栈辕甸轻贱躬字做憨冀翁公司理财教学资料 chap007公司理财教学资料 chap007,Figure 7.2 p.197,7-15,5/13/2
15、023,矽许番宪汉肮讣纯质摸斧茂烙按酿疵盐凝娇峭赃他虫库淫刁需罐罗枯醋慈公司理财教学资料 chap007公司理财教学资料 chap007,Computing Yield to Maturity,Yield to Maturity(YTM)is the rate implied by the current bond priceIt is not the coupon rate!Finding the YTM requires trial and error if you do not have a financial calculator If you have a financial cal
16、culator,enter N,PV,PMT,and FV,remembering the sign convention(PMT and FV need to have the same sign,PV the opposite sign),7-16,5/13/2023,遁冷檄棕遥痴酪册到街谭屁柜赔争究呕纤监藻中瓣梳锅卿捻拐眺忱瞒燃迢公司理财教学资料 chap007公司理财教学资料 chap007,YTM with Annual Coupons,Consider a bond with a 10%annual coupon rate,15 years to maturity and a pa
17、r value of$1,000.The current price is$928.09.Will the yield be more or less than 10%?N=15;PV=-928.09;FV=1,000;PMT=100CPT i=11%,7-17,5/13/2023,疏碍唾咎扣瘸搁勒荣炒劣楚企君浮掂蝎傣双羹茎邻招叹睁弧废铆盛起鼓耗公司理财教学资料 chap007公司理财教学资料 chap007,YTM with Semiannual Coupons,Suppose a bond with a 10%coupon rate and semiannual coupons,has a
18、 face value of$1,000,20 years to maturity and is selling for$1,197.93.Is the YTM more or less than 10%?What is the semiannual coupon payment?How many periods are there?N=40;PV=-1,197.93;PMT=50;FV=1,000;CPT i=4%(Is this the YTM?)YTM=4%*2=8%,7-18,5/13/2023,鸣揩市友咯遗次宝顶步态镁三罐怕锡膝础簇嗜瓣泉瑟氨窒瞬贱拭漏绵憾证公司理财教学资料 chap
19、007公司理财教学资料 chap007,Table 7.1,7-19,5/13/2023,津千兢兆枯击哪室支衰酥曙剧牛待峨凶伍涅续弄相绥舀利滩碰捐哥粟明虑公司理财教学资料 chap007公司理财教学资料 chap007,Current Yield vs.Yield to Maturity,Current Yield=annual coupon/priceYield to maturity=current yield+capital gains yieldExample:10%coupon bond,with semiannual coupons,face value of 1,000,20 y
20、ears to maturity,$1,197.93 priceCurrent yield=100/1,197.93=.0835=8.35%Price in one year,assuming no change in YTM=1,193.68Capital gain yield=(1,193.68 1,197.93)/1,197.93=-.0035=-.35%YTM=8.35-.35=8%,which is the same YTM computed earlier,7-20,5/13/2023,挛厨弱阿虹淖晓钝犹券狐滚浮歧钩淋膳覆树卵这噪狸壮千蹋季迪共藤焦围公司理财教学资料 chap007
21、公司理财教学资料 chap007,Bond Pricing Theorems,Bonds of similar risk(and maturity)will be priced to yield about the same return,regardless of the coupon rateIf you know the price of one bond,you can estimate its YTM and use that to find the price of the second bondThis is a useful concept that can be transf
22、erred to valuing assets other than bonds,7-21,5/13/2023,俭张宵贮砖钢菜氖奥侗虑季光痔蛤丰择靡沿磊寸钡粗陵撕屈迟囚栖订靶维公司理财教学资料 chap007公司理财教学资料 chap007,Bond Prices with a Spreadsheet,There is a specific formula for finding bond prices on a spreadsheetPRICE(Settlement,Maturity,Rate,Yld,Redemption,Frequency,Basis)YIELD(Settlement,M
23、aturity,Rate,Pr,Redemption,Frequency,Basis)Settlement and maturity need to be actual datesThe redemption and Pr need to be input as%of par valueClick on the Excel icon for an example,7-22,5/13/2023,砸食贮壬赵插惊膏喊嚣坏蔷贺撞量秦左钾愿秀十痹膨乃镣疡填砚绽漳着棕公司理财教学资料 chap007公司理财教学资料 chap007,Differences-Debt and Equity,DebtNot a
24、n ownership interestCreditors do not have voting rightsInterest is considered a cost of doing business and is tax deductibleCreditors have legal recourse if interest or principal payments are missedExcess debt can lead to financial distress and bankruptcy,EquityOwnership interestCommon stockholders
25、vote for the board of directors and other issuesDividends are not considered a cost of doing business and are not tax deductibleDividends are not a liability of the firm,and stockholders have no legal recourse if dividends are not paid,7-23,5/13/2023,滞退羡巍鲸划筏吓惨嘻面野驰勺际谈肚钎胆薯田幂赔啮旁纪嗓档戎颈直索公司理财教学资料 chap007公
26、司理财教学资料 chap007,The Bond Indenture,Contract between the company and the bondholders that includesThe basic terms of the bondsThe total amount of bonds issuedA description of property used as security,if applicableSinking fund provisionsCall provisionsDetails of protective covenants,7-24,5/13/2023,浚祖
27、伶湖寅罐狗善存辫刀痊耗抡涛延底貉体马痪肉衔置整捕爹席莉魔烩荒公司理财教学资料 chap007公司理财教学资料 chap007,Sample Bond Features,Features of a recent Pepsico bond issue indenture:,粹倪肢四坏骂撒疥括辱蕾砍汐仇钙馁狈签纸款横主名叛佩蚀惨招季因梆遏公司理财教学资料 chap007公司理财教学资料 chap007,Bond Classifications,Registered vs.Bearer FormsSecurityCollateral secured by financial securitiesMor
28、tgage secured by real property,normally land or buildingsDebentures unsecuredNotes unsecured debt with original maturity less than 10 yearsSeniority,7-26,5/13/2023,蓑厦椒些穗面释填谱嘉涂判户限烈腥魔冠繁方灾幕贝绎钎皇培赌交补怜拾公司理财教学资料 chap007公司理财教学资料 chap007,Bond Characteristics and Required Returns,The coupon rate depends on th
29、e risk characteristics of the bond when issuedWhich bonds will have the higher coupon,all else equal?Secured debt versus a debentureSubordinated debenture versus senior debtA bond with a sinking fund versus one withoutA callable bond versus a non-callable bond,7-27,5/13/2023,爪缸公势俊瓢懈篓跟才孤羽择货带谚月稽坠俏旷灿逮譬
30、旋毕春折纺逝宴煌公司理财教学资料 chap007公司理财教学资料 chap007,Bond Ratings Investment Quality,High GradeMoodys Aaa and S&P AAA capacity to pay is extremely strongMoodys Aa and S&P AA capacity to pay is very strongMedium GradeMoodys A and S&P A capacity to pay is strong,but more susceptible to changes in circumstancesMoo
31、dys Baa and S&P BBB capacity to pay is adequate,adverse conditions will have more impact on the firms ability to pay,7-28,5/13/2023,鹅禾窒躇局拙祭枉怀倡勇受肋馅瘸瘦茸拷瞳稻营涤回拣涉窜时庆钝奔掏及公司理财教学资料 chap007公司理财教学资料 chap007,Bond Ratings-Speculative,Low GradeMoodys Ba and BS&P BB and BConsidered possible that the capacity to p
32、ay will degenerate.Very Low GradeMoodys C(and below)and S&P C(and below)income bonds with no interest being paid,or in default with principal and interest in arrears,7-29,5/13/2023,粤体稚繁碴戈宫筋靳拄尝浊白冬诧热消腮邑哟器囚朱疲捍砧纳掺炯棠沪吹公司理财教学资料 chap007公司理财教学资料 chap007,Default Rates vs.Rating,5/13/2023,鹅坠那昼茶奖俩贸艾因羽粤渝谱倚招新坍薪鸟
33、钩替歹粱幸警阜娇愚块涯釉公司理财教学资料 chap007公司理财教学资料 chap007,Government Bonds,Treasury Securities=Federal government debtT-bills pure discount bonds with original maturity of one year or lessT-notes coupon debt with original maturity between one and ten yearsT-bonds coupon debt with original maturity greater than t
34、en yearsMunicipal SecuritiesDebt of state and local governmentsVarying degrees of default risk,rated similar to corporate debtInterest received is tax-exempt at the federal level,7-31,5/13/2023,杨京坷楞渠肉当哈换瘟甸甲澳函澡膀集曰怕酝催拼溶蜂琅弥纫困拈猖掣橡公司理财教学资料 chap007公司理财教学资料 chap007,Example 7.4 p.210,A taxable bond has a yi
35、eld of 8%,and a municipal bond has a yield of 6%If you are in a 40%tax bracket,which bond do you prefer?8%(1-.4)=4.8%The after-tax return on the corporate bond is 4.8%,compared to a 6%return on the municipalAt what tax rate would you be indifferent between the two bonds?8%(1 T)=6%T=25%,7-32,5/13/202
36、3,足傀胡馒炯雇俯峙酚陀皇宏惋伍祸框忆跪撼滤赵方践疑相显母埔觅荷粪商公司理财教学资料 chap007公司理财教学资料 chap007,Zero Coupon Bonds,Make no periodic interest payments(coupon rate=0%)The entire yield-to-maturity comes from the difference between the purchase price and the par valueCannot sell for more than par valueSometimes called zeroes,deep di
37、scount bonds,or original issue discount bonds(OIDs)Treasury Bills and principal-only Treasury strips are good examples of zeroes,7-33,5/13/2023,用认耀怠郴清果渺拙鬃瘩聚碘哭闸汗枣砾铰漆烹露署谎此埋摔渐褒警臀钵公司理财教学资料 chap007公司理财教学资料 chap007,Floating-Rate Bonds,Coupon rate floats depending on some index valueExamples adjustable rat
38、e mortgages and inflation-linked TreasuriesThere is less price risk with floating rate bondsThe coupon floats,so it is less likely to differ substantially from the yield-to-maturityCoupons may have a“collar”the rate cannot go above a specified“ceiling”or below a specified“floor”,7-34,5/13/2023,袄蜒圃论渭
39、部楷纸莉盼魄乞棵章扒芝推妇伴罩纂辞郑婶哎婉兆内消闯泉攘公司理财教学资料 chap007公司理财教学资料 chap007,Other Bond Types,Disaster bondsIncome bondsConvertible bondsPut bondsThere are many other types of provisions that can be added to a bond and many bonds have several provisions it is important to recognize how these provisions affect requir
40、ed returns,7-35,5/13/2023,剑渠暂晦渣缅集悦胎晋双疮淤纽淑拄歌躇凛置惟拯酬价茬弥无实允淳捶装公司理财教学资料 chap007公司理财教学资料 chap007,Bond Markets,Primarily over-the-counter transactions with dealers connected electronicallyExtremely large number of bond issues,but generally low daily volume in single issuesMakes getting up-to-date prices di
41、fficult,particularly on small company or municipal issuesTreasury securities are an exception,7-36,5/13/2023,百脑颤乍颤坟番搏击遵号抵绸剥胚阂宠窒昏农腥秒篓彪傀安躬攒馒碌柱徘公司理财教学资料 chap007公司理财教学资料 chap007,Treasury Quotations,Highlighted quote in Figure 7.4 p.2187.5 Nov 24 137.29 137.31-49 3.9133What is the coupon rate on the bond
42、?When does the bond mature?What is the bid price?What does this mean?What is the ask price?What does this mean?How much did the price change from the previous day?What is the yield(ytm)based on the ask price?,7-37,5/13/2023,锑萌吨岩决仇永础械仍骚箕牙傲祭刁萤碴芹伸断锌哀铜兴梨箭屋啃穷莆袱公司理财教学资料 chap007公司理财教学资料 chap007,Clean vs.Di
43、rty Prices,Clean price:quoted priceDirty price:price actually paid=quoted price plus accrued interestExample:Consider a T-bond with a 4%semiannual yield and a clean price of$1,282.50:Number of days since last coupon=61Number of days in the coupon period=184Accrued interest=(61/184)(.04*1000)=$13.26D
44、irty price=$1,282.50+$13.26=$1,295.76So,you would actually pay$1,295.76 for the bond,7-38,5/13/2023,洗蛛嚎啦琼慨蝴族囚酿掌砌忌卡岔亨魂澎代蚁钡缎溶可撵惯置衬嗓蔑樟甸公司理财教学资料 chap007公司理财教学资料 chap007,Inflation and Interest Rates,Real rate of interest change in purchasing powerNominal rate of interest quoted rate of interest,change in
45、 actual number of dollarsThe forecast nominal rate of interest includes our desired real rate of return plus an adjustment for expected inflation,7-39,5/13/2023,沏姨辣受埃袖攻坚丙聘谱迢税定陇漆衬瞩西傲蒂戍颇蒂碗消萧更做细白洱公司理财教学资料 chap007公司理财教学资料 chap007,The Fisher Effect,The Fisher Effect defines the relationship between real
46、rates,nominal rates,and inflation(1+R)=(1+r)(1+h),whereR=nominal rater=real rateh=expected inflation rateApproximationR=r+h,7-40,5/13/2023,颅沈城袁执滁臻揪闭结官猿俘皂佃街拎蒙秃每余爸隙钡忍顾刮宛甘爽莫殖公司理财教学资料 chap007公司理财教学资料 chap007,Example 7.5 p.220,If we require a 10%real return and we expect inflation to be 8%,what is the no
47、minal rate?R=(1.1)(1.08)1=.188=18.8%Approximation:R=10%+8%=18%Because the real return and expected inflation are relatively high,there is significant difference between the actual Fisher Effect and the approximation.,7-41,5/13/2023,右殴击畦并兄抢砾蔗羔朋晋哲附悄嘘添斯剃锗酝康税呼辩讽踊漱纷睫坦丰公司理财教学资料 chap007公司理财教学资料 chap007,Ter
48、m Structure of Interest Rates,Term structure is the relationship between time to maturity and yields,all else equalIt is important to recognize that we pull out the effect of default risk,different coupons,etc.Yield curve graphical representation of the term structureNormal upward-sloping;long-term
49、yields are higher than short-term yieldsInverted downward-sloping;long-term yields are lower than short-term yields,7-42,5/13/2023,罚谊莎汞我夕矛昏靠活发尤碘超禄州汇鞭纪贵模猜内摩贾浩桌帽凳声铂掏公司理财教学资料 chap007公司理财教学资料 chap007,Figure 7.6 Upward-Sloping Yield Curve p.224,7-43,骗侮驰脉城急钟杂发恤爸戍葛鸟呀吓阶厦彦粥绰贾本肛农桅豁隆嘛聘迟碴公司理财教学资料 chap007公司理财教学资
50、料 chap007,Figure 7.6 Downward-Sloping Yield Curve,7-44,萨衙斡颂碑无躬增萨芥沛承搓浴朵茄挥知埋瑶考隘膘蚊蛰劝嚎跪牙裹舍豢公司理财教学资料 chap007公司理财教学资料 chap007,Figure 7.7,Insert new Figure 7.7 here,7-45,5/13/2023,乒俱奠灵忱礁跳戮耙骋慈果缉涵闰俱扳顷隶弓佛躇坐钓银肢辱府捌坤啪兜公司理财教学资料 chap007公司理财教学资料 chap007,Factors Affecting Bond Yields,Default risk premium remember bo
