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1、Chapter 10The Bond MarketChapter PreviewIn this chapter, we focus on longer-term securities: bonds. Bonds are like money market instruments, but they have maturities that exceed one year. These include Treasury bonds, corporate bonds, mortgages, and the like.2Copyright 2009 Pearson Prentice Hall. Al
2、l rights reserved.Chapter PreviewTopics include:Capital Market: Purposes, Participants and TradingTypes of BondsTreasury Notes and BondsMunicipal BondsCorporate BondsFinancial Guarantees for BondsCurrent Yield CalculationFinding the Value of Coupon BondsInvesting in Bonds3Copyright 2009 Pearson Pren
3、tice Hall. All rights reserved.Purpose of the Capital MarketCapital markets are for securities with an originalmaturity that is greater than one year.For investors:Long-term investmentFor borrowers: Reduce the interest rate risk 4Copyright 2009 Pearson Prentice Hall. All rights reserved.Capital Mark
4、et ParticipantsPrimary issuers of securities:Federal and local governments: debt issuersCorporations: equity and debt issuersCapital structure：the distribution of a firms captial between debt and equityLargest purchasers of securities:You and me5Copyright 2009 Pearson Prentice Hall. All rights reser
5、ved.Capital Market TradingCapital MarketPrimary Market Secondary MarketIPO/Simply primary market transactionOrganized exchangesOver-the Counter exchanges6Copyright 2009 Pearson Prentice Hall. All rights reserved.Types of BondsCoupon rateThe rate of interest that the issuer must payBonds are securiti
6、es that represent debt owed by the issuer to the investor, and typically have specified payments on specific dates.Par valueThe amount that the issuer must pay at maturity.Types of bondsLong-term government bonds Municipal bondsCorporate bonds.7Copyright 2009 Pearson Prentice Hall. All rights reserv
7、ed.Types of Bonds: Sample Corporate Bond8Copyright 2009 Pearson Prentice Hall. All rights reserved.Treasury Notes and BondsThe U.S. Treasury issues notes and bonds to finance its operations.The following table summarizes the maturity differences among the various Treasury securities.9Copyright 2009
8、Pearson Prentice Hall. All rights reserved.Treasury BondsNo default risk since the Treasury can print money to payoff the debtVery low interest rates, often considered the risk-free rate This does not mean that these securities are risk -free, inflation risk is still present.10Copyright 2009 Pearson
9、 Prentice Hall. All rights reserved.Treasury Bond Interest Rates11Copyright 2009 Pearson Prentice Hall. All rights reserved.Treasury Bonds: Recent InnovationTreasury Inflation Protected Securities: They are designed to remove inflation risk from holding treasuriesThe interest rate does not changeThe
10、 principal amount is tied to the current rate of inflation to protect investor purchasing power12Copyright 2009 Pearson Prentice Hall. All rights reserved.Treasury Bonds: Agency DebtAlthough not technically Treasury securities, agency bonds are issued by government-sponsored entities, such as GNMA,
11、FNMA, and FHLMC.The debt has an “implicit” guarantee that the U.S. government will not let the debt default.13Copyright 2009 Pearson Prentice Hall. All rights reserved.Municipal BondsMunicipal bonds are securities issued by local, county, and state governmentsUsed to finance public interest projects
12、Tax-free municipal interest rate = taxable interest rate (1 marginal tax rate)14Copyright 2009 Pearson Prentice Hall. All rights reserved.Municipal BondsThey are backed by the full faith and creditMost general obligation bonds issues must be approved by the taxpayersThey are backed by the cash flow
13、of a particular revenue-generating projectThey tend to be issued more frequentlyNOT default-free15Copyright 2009 Pearson Prentice Hall. All rights reserved.Municipal Bonds: Comparing Revenue and General Obligation Bonds16Copyright 2009 Pearson Prentice Hall. All rights reserved.Corporate BondsWhen l
14、arge corporations need to borrow funds for long periods of time, they may issue bondbond.Typically have a face value of $1,000, although some have a face value of $5,000 or $10,000Pay interest semi-annuallyDegree of risk varies with each bond, even from the same issuer. The required interest rate va
15、ries with level of risk.17Copyright 2009 Pearson Prentice Hall. All rights reserved.Corporate Bonds: Interest Rates18Copyright 2009 Pearson Prentice Hall. All rights reserved.Corporate Bonds: Characteristics of Corporate BondsRegistered BondsReplaced “bearer” bondsIRS can track interest income this
16、wayRestrictive CovenantsMitigates conflicts with shareholder interestsMay limit dividends, new debt, ratios, etc.The interest rate will be lower the more restriction19Copyright 2009 Pearson Prentice Hall. All rights reserved.Corporate Bonds: Characteristics of Corporate BondsCall Provisions Interest
17、 rate changeSinking fundInterest of the stockholders Alter issuers capital structureConversion Some debt may be converted to equitySimilar to a stock option, but usually more limited20Copyright 2009 Pearson Prentice Hall. All rights reserved.Corporate Bonds: Types of Corporate BondsSecured BondsSecu
18、red bonds are ones with collateral attached.Mortgage bondsEquipment trust certificatesUnsecured BondsDebentures: they are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer and no specific collateral is pledged to repay the debt.Subordinated debentures21Copy
19、right 2009 Pearson Prentice Hall. All rights reserved.Junk BondsDebt that is rated below BBBOften, trusts and insurance companies are not permitted to invest in junk debtMichael Milken developed this market in the mid-1980s, although he was convicted of insider tradingCorporate Bonds: Types of Corpo
20、rate Bonds22Copyright 2009 Pearson Prentice Hall. All rights reserved.Financial Guarantees for BondsSome debt issuers purchase financial guarantees to lower the risk of their debt.A financial guarantee ensures that the lender(bond purchaser) will be paid both principal and interest in the event the
21、issue default.The guarantee provides for timely payment of interest and principal, and are usually backed by large insurance companies.23Copyright 2009 Pearson Prentice Hall. All rights reserved.Bond Yield CalculationsThe current yield is an approximation of the yield to maturity on coupon bond.The
22、current yield is defined as the yearly coupon payment divided by the price of the security.We will examine the current yield calculation that is commonly used for long-term debt.24Copyright 2009 Pearson Prentice Hall. All rights reserved.Bond Current Yield CalculationWhat is the current yield for a
23、bond with a face value of $1,000, a current price of $921.01, and a coupon rate of 10.95%?Answer:ic = C / P = $109.50 / $921.01 = 11.89%Note: C ( coupon) = 10.95% x $1,000 = $109.50 25Copyright 2009 Pearson Prentice Hall. All rights reserved.Finding the Value of Coupon BondsBond pricing is, in theor
24、y, no different than pricing any set of known cash flows. Once the cash flows have been identified, they should be discounted to time zero at an appropriate discount rate.The table on the next slide outlines some of the terminology unique to debt, which may be necessary to understand to determine th
25、e cash flows.26Copyright 2009 Pearson Prentice Hall. All rights reserved.Finding the Value of Coupon BondsWhat is the price of 2-year, 10% coupon bond (semi-annual coupon payments) with a face value of $1,000 and a required rate of 12%?Solution:1.Identify the cash flows:$50 is received every six mon
26、ths in interest$1000 is received in two years as principal repayment2.Find the present value of the cash flows:N = 4, FV = 1000, PMT = 50, I = 6Computer the PV. PV = 965.35- Discount bond27Copyright 2009 Pearson Prentice Hall. All rights reserved.Quantitative ProblemsConsider the two bonds described
27、 below：a. If both bonds had a required return of 8%, what would the bonds prices be?b. Describe what it means if a bond sells at a discount, a premium, and at its face amount(par value). Are these two bonds selling at a discount, premium, or par? BOND A BOND BMaturity( years)12Coupon rate(%) paid se
28、miannually106Par value1000100028Copyright 2009 Pearson Prentice Hall. All rights reserved.Investing in BondsBonds are the most popular alternative to stocks for long-term investing, because bonds are lower risk than stocks.Even though the bonds of a corporation are less risky than its equity, invest
29、ors still have risk: interest rate risk.29Copyright 2009 Pearson Prentice Hall. All rights reserved.Investing in BondsThe next slide shows the amount of bonds and stock issued from 1983 to 2006.Note how much larger the market for new debt is. Even in the late 1990s, which were boom years for new equ
30、ity issuances, new debt issuances still outpaced equity by over 5:1.30Copyright 2009 Pearson Prentice Hall. All rights reserved.Investing in Bonds31Copyright 2009 Pearson Prentice Hall. All rights reserved.Chapter SummaryPurpose of the Capital Market: provide financing for long-term capital assetsCa
31、pital Market Participants: governments and corporations issue bond, and we buy themCapital Market Trading: primary and secondary markets exist for most securities of governments and corporations32Copyright 2009 Pearson Prentice Hall. All rights reserved.Chapter Summary (cont.)Types of Bonds: include
32、s Treasury, municipal, and corporate bondsTreasury Notes and Bonds: issued and backed by the full faith and credit of the U.S. Federal governmentMunicipal Bonds: issued by state and local governments, tax-exempt, defaultable.33Copyright 2009 Pearson Prentice Hall. All rights reserved.Chapter Summary
33、 (cont.)Corporate Bonds: issued by corporations and have a wide range of features and riskFinancial Guarantees for Bonds: bond “insurance” should the issuer defaultBond Current Yield Calculation: how to calculation the current yield for a bond34Copyright 2009 Pearson Prentice Hall. All rights reserv
34、ed.Chapter Summary (cont.)Finding the Value of Coupon Bonds: determining the cash flows and discounting back to the present at an appropriate discount rateInvesting in Bonds: most popular alternative to investing in the stock market for long-term investments35Copyright 2009 Pearson Prentice Hall. All rights reserved.
