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1、Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,1,Chapter 8: Valuation of Known Cash Flows: Bonds,Objective Valuation of fixed income securities Explain why bond prices change,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,2,Chapter 8 Contents,8.1 Using Present
2、 Value Formulas to Value Known Flows 8.2 The Basic Building Blocks: Pure Discount Bonds 8.3 Coupon Bonds, Current Yield, and Yield-to-Maturity 8.4 Reading Bond Listings 8.5 Why Yields for the same Maturity Differ 8.6 The Behavior of Bond Prices Over Time,Copyright 2009 Pearson Education, Inc. Publis
3、hing as Prentice Hall,3,8.1 Using Present Value Formulas to Value Known Flows,You have been offered the opportunity to purchase a mortgage. It was originally part of a creative financing package where the original owner financed the buyer The remaining life of the mortgage is 60 months, with payment
4、 of $400. Your required rate of return is 1.5% / month,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,4,Calculation,Using the present value of an annuity formula discussed in chapter 4, you will pay no more than,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,5
5、,Financial Calculator,Alternatively, using your financial calculator (remember to set the correct defaults) you obtain,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,6,Change in Required Rate,If your required rate of return increased to 1.6% / month,Copyright 2009 Pearson Educati
6、on, Inc. Publishing as Prentice Hall,7,Using Present Value Formulas to Value Known Flows,Observe that the maximum you would pay for the bond has decreased An increase in the required rate of return always leads to a decrease in the value of a fixed income security The proof is very easy,Copyright 20
7、09 Pearson Education, Inc. Publishing as Prentice Hall,8,Bond Prices Rise as the Interest Rates Fall,Write the PV of the fixed income security as the sum terms,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,9,Bond Prices Rise as the Interest Rates Fall,If i goes up, 1+i goes up,
8、1/(1+i) goes down for i -1, (1/(1+i)j goes down for i 0. So if the payments are positive, then the sum must also go down Similarly, i down - PV up,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,10,Bond Prices Rise as the Interest Rates Fall,Basic principle in evaluating known flo
9、ws A change in market interest rates causes a change in the opposite direction in the market values of all existing contracts promising fixed payments in the future,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,11,Note,Volatile market rates imply volatile market values,Copyright
10、 2009 Pearson Education, Inc. Publishing as Prentice Hall,12,Finding the Correct Discount Rate,Bond analysis is not as easy as this analysis appears to imply We need an interest rate to use in the formula We saw in Chapter 2 that interest rates are a function of time-to-maturity Two default-free bon
11、ds with identical maturities may have different YTMs,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,13,Yield Curve,A typical yield curve:,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,14,8.2 The Basics Building Blocks: Pure Discount Bonds,We can always analyz
12、e any fixed income contract into a sum of pure discount bonds A pure discount bond is a security that promises to pay a specified single cash payment (face value or par value) at a specified date called its maturity date,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,15,Pure Disc
13、ount Bonds,Note There is no cash flow associated with interest Pure discount bonds are purchased at a discount from their face or par value,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,16,Pure Discount Bonds,The pure discount bond is an example of the present value of a lump su
14、m equation we analyzed in Chapter 4 Solving this, the yield-to-maturity on a pure discount bond is given by the relationship:,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,17,Pure Discount Bonds,In this equation, P is the present value or price of the bond F is the face or futur
15、e value n is the investment period i is the yield-to-maturity,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,18,Pure Discount Bonds,Example You can purchase a pure discount bond for $9,000, and it matures in two years with a face value of $10,000 What is the ytm?,Copyright 2009 P
16、earson Education, Inc. Publishing as Prentice Hall,19,Pure Discount Bonds,Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall,20,8.3 Coupon Bonds, Current Yield, and Yield to Maturity,A coupon bond obligates the issuer to make periodic payments of interest (called coupon payments) to the bond holder until the bond matures at which time the face value of the bond is also paid to the bond holder and the contract is satisfied,Copyright 2
