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Words 4544

Pages 19

Bond Prices and Yields

Catastrophe bond: Typically issued by an insurance company. They are similar to an insurance policy in that the investor receives coupons and par value, but takes a loss in part or all of the principal if a major insurance claim is filed against the issuer. This is provided in exchange for higher than normal coupons.

Eurobond: They are bonds issued in the currency of one country but sold in other national markets.

Zero-coupon bond: Zero-coupon bonds are bonds that pay no coupons but do pay a par value at maturity.

Samurai bond: Yen-denominated bonds sold in Japan by non-Japanese issuers are called Samurai bonds.

Junk bond: Those rated BBB or above (S&P, Fitch) or Baa and above (Moody’s) are considered investment grade bonds, while lower-rated bonds are classified as speculative grade or junk bonds.

Convertible bond: Convertible bonds may be exchanged, at the bondholder’s discretion, for a specified number of shares of stock. Convertible bondholders “pay” for this option by accepting a lower coupon rate on the security.

Serial bond: A serial bond is an issue in which the firm sells bonds with staggered maturity dates. As bonds mature sequentially, the principal repayment burden for the firm is spread over time just as it is with a sinking fund. Serial bonds do not include call provisions.

Equipment obligation bond: A bond that is issued with specific equipment pledged as collateral against the bond.

Original issue discount bonds: Original issue discount bonds are less common than coupon bonds issued at par. These are bonds that are issued intentionally with low coupon rates that cause the bond to sell at a discount from par value.

Indexed bond: Indexed bonds make payments that are tied to a general price index or the price of a particular commodity. Callable bonds give the issuer the…...

...Bond Yields Interest rates have a big part in determining the yield of a bond. If interest rates rise, the bond will be worth less and if they fall bonds will be worth more. The Yield to Maturity or YTM is the rate of return the lender or borrower will earn if the bond is not sold before its maturity. It can be also referred to as the bond`s yield. In order to be able to calculate the Yield to Maturity, some of the things you would need to know are the current price, the par value, the interest payments, and the maturity date for the bond. A coupon is the stated interest payment made on a bond. The market value will be less than par value if the required rate of return is above the coupon interest rate. Bond will be valued above pay value if the required rate of return is below the coupon interest rate. Also, the lower the coupon rate the greater the interest rate risk. Interest rate risk refers to the risk of fluctuating interest rates. In other words, bond values have an inverse relationship to interest rates. Long-term bonds will have a greater interest rate risk than short-term bonds. Interest rates have a greater impact on long-term bonds because it takes longer for them to mature. Typically, the more you can earn from a bond the more risk there is to it. However, the more risk there is to a bond the more likely either the borrower might default. Bonds have a rating system which gives them a rating based on the......

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...MEASURES OF YIELD In order to be able to exhaust the measures of yield, the following terms will be of great essence in helping maximum elaboration of the measures. Coupon: The interest payment sent to the owner of an individual bond, usually twice a year. The coupon rate is the interest rate the issuer promises to pay to the investor. For fixed-income investments, this rate is fixed at the time a bond is issued and doesn't change. Market interest rates: The prevailing interest rates in the bond markets on any particular day. These rates change based on the economy, policies and other factors. There is no single market interest rate. The rates will vary based on the time to maturity for a particular bond, the credit quality of the issuer and other factors. Market price: The current value of an existing bond if you wanted to sell. This is the price you'd see on your quarterly statements. Market prices can be above (or at a premium to) the par value, or below (at a discount to) the par value, depending on current market interest rates, the promised coupon rate and other conditions. Maturity: The date that a bond's par (face) value is repaid and interest payments stop. The longer the time to maturity, generally, the higher the interest rate will be—but the higher the risk of a bond's price falling, as well, if market interest rates increase. As time passes and the maturity date approaches, the impact of interest rates declines. The price of a bond, if trading...

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...Bonds are appealing to investors because they provide a generous amount of current income and they can often generate large capital gains. These two sources of income together can lead to attractive and highly competitive investor returns. Bonds make an attractive investment outlet because of their versatility. They can provide a conservative investor with high current income or they can be used aggressively by investors who prefer capital gains. Given the wide and frequent swings in interest rates, investors can find a variety of investment opportunities. In addition to their versatility, certain types of bonds can be used to shelter income from taxes. While municipal bonds are perhaps the best known tax shelters, some Treasury and federal agency bonds also give investors some tax advantages. Bonds are exposed to the following five major types of risk: (1) Interest rate risk: This affects the market as a whole and therefore translates into market risk. When market interest rates rise, bond prices fall, and vice versa. (2) Purchasing power risk: This is the risk caused by inflation. When inflation heats up, bond yields lag behind inflation rates. A bond investor is locked into a fixed-coupon bond even though market yields are rising with inflation. (3) Business/financial risk: This refers to the risk that the issuer will default on interest and/or principal payments. Business risk is related to the quality and integrity of the issuer, whereas financial risk relates to the......

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...------------------------------------------------- Top of Form Bottom of Form * Bond Markets / Prices * Commentary * Learn More * Overview * Bond Basics * What You Should Know * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites Learn More * Overview * Bond Basics * What You Should Know * Overview * The Role of Bonds in America * Investor's Checklist * Investor Protection * Asset Allocation * Reading Bond Prices In the Newspaper * Understanding Economic Statistics * Bond and Bond Funds * Risks of Investing in Bonds * Rating Changes and Your Investments * Corporate Bankruptcy & Your Investment * Selecting and Working with a Financial Professional * Rising Rates and Your Investments * Tax Tables * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites What You Should Know * Print * Email Risks of Investing in Bonds All investments offer a balance between risk and......

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...Yield Curve and Bond Valuation Name: Lecturer: Course: Date: Yield Curve and Bond Valuation Question 1 and 2 Based on the information retrieved from the Board of Governors of the Federal Reserve System on a 1-month business day, the following information concerning historical dairy interest rates on the U.S treasury was obtained. The rates were picked from the current dates (1st January2012) back to five years a go (1st January 2007). Whereby, if that date was not a business date the preceding date was selected as shown in the table below. |Business Date chosen Five Years Ago |1st January 2007 | |1-month Nominal T-bill Rate on that date |5.02% | |3--month Nominal T-bill Rate on that date |4.79% | |6-month Nominal T-bill Rate on that date |5.11% | |1-year Nominal T-note Rate on that Date |5% | |5-year Nominal T-note Rate on that Date |4.68% | |10-year Nominal T-note Rate on that Date ...

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...What fundamentals affect the yield of bonds (Singapore market) By: G8 Lee Kang Wee Olivia Tan Daryle-‐alexis Tan Ho Guoming FIIM FNCE 102 Professor Huang Sheng Introduction As an international financial centre with about 11% of GDP from financial services, we felt it would be interesting to find out more about the Singapore money market. Since the start of the new millennium, Singapore’s bond market has taken off and has now one of the most developed bond markets in Asia with about SGD357 billion in 2011 and this number is expected to grow further with more and more money flying into Asia from the West due to various economic situations. One area of high growth is in the Islamic debt area. For the purpose of ......

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...MEASURING YIELD CHAPTER SUMMARY In Chapter 2 we showed how to determine the price of a bond, and we described the relationship between price and yield. In this chapter we discuss various yield measures and their meaning for evaluating the relative attractiveness of a bond. We begin with an explanation of how to compute the yield on any investment. COMPUTING THE YIELD OR INTERNAL RATE OF RETURN ON ANY INVESTMENT The yield on any investment is the interest rate that will make the present value of the cash flows from the investment equal to the price (or cost) of the investment. Mathematically, the yield on any investment, y, is the interest rate that satisfies the equation. ------------------------------------------------- P = ------------------------------------------------- ------------------------------------------------- where CFt = cash flow in year t, P = price of the investment, N = number of years. The yield calculated from this relationship is also called the internal rate of return. ------------------------------------------------- ------------------------------------------------- Solving for the yield (y) requires a trial-and-error (iterative) procedure. The objective is to find the yield that will make the present value of the cash flows equal to the price. Keep in mind that the yield computed is the yield for the period. That is, if the cash flows are semiannual, the yield is a semiannual yield. If the cash flows are monthly, the......

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... 07/24/2011 5.1 Jackson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually...? Jackson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the market price of these bonds? Solution:- Rate = 9% Nper =12 PMT = 1000x8%=-80 FV = -1,000 PV = ? Solve for PV PV = $928.39 Market Price of the bond = $928.39 5-2-Wilson Wonders’s bond have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? USING A BOND YOELD CALCULATOR Current Price = $850 Par Value = $1000 Coupon Rate = 10% Years t5o Maturity = 12 Years CALCULATION RESULT Current Yield = 11.765 Yield to Maturity = 12.48 5-6. The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2- year Treasury security yields 6.3 % . What is the maturity risk premium for the two year security? K= K* + IP + DRP + LP + MRP KT-2 = 6.3% = 3% +3% + MRP; DRP=LP=0 MRP = 6.3%-6% MRP=0.3% 5-7. Renfro Rentals has issued bonds that have a 10%coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds? Answer:- FV =1,000, PMT= 50, N= 16, R=......

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...Why I like High Yields Bonds 1. Defaults LOW-now & and in the forseeable future are not a significant factor: * Fundamentals-reduced expenses, reducing debt(deleveraging), Diluting stock holders to raise capital-beautiful environment to service debt. “Companies are not expanding they are maintaining” “We have one the best credit quality periods in the HY space U.S. History” 2. Liquidity controlled-Keeping maturities shorter- Having the ability to move out of positions more easily is controlled by shorter maturities. This also helps reduce the effect of interest rate hikes. “We like modest inflation because of our shorter duration-as bonds roll off we can reinvest at better yields” 3. More predictable returns with reduced volatility: * Promise to pay * Increased claims right on company(better than stock, preferreds)-Have been increasing our senior secured positions.-now @35% * In Jan. 2004 the HY prices were a few percent higher on the index than they are now and the return on the index(Merrill Lynch HY Master) in 2004 was 10.76%. * In the last 25 years the index has had 20 positive years and only 5 negative. With a 25 year period return of over 9% * From 1992 thru Jan 1 2009 the standard deviation of HY bonds has been ½ of the SD of the S&P 500(source factset) 4. Non-coorelation to U.S. Treasury * As interest rate rise treasury prices increase and yield declines-our shorter term portfolio enjoy the strength of a......

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...BONDS AND SINKING FUNDS Amortization of Bond Premiums and Discounts *APPENDIX: The origin and calculation of bond premiums and discounts were discussed in Section 15.2. We will now look at the premiums and discounts from an accountant’s perspective. The point of view and the schedules developed here provide the basis for the accounting treatment of bond premiums, discounts, and interest payments. Amortization of a Bond’s Premium Bonds are priced at a premium when the coupon rate exceeds the yield to maturity required in the bond market. Suppose that a bond paying a 10% coupon rate is purchased three years before maturity to yield 8% compounded semiannually. The purchase price that provides this yield to maturity is $1052.42. The accounting view is that a period’s earned interest is the amount that gives the required rate of return on the bond investment. The interest payment after the first six months that would, by itself, provide the required rate of return (8% compounded semiannually) on the amount invested is 0.08 ϫ $1052.42 ϭ $42.10 2 The earned interest during the first six months from an accounting point of view is $42.10. The actual first coupon payment of $50 pays $50 Ϫ $42.10 ϭ $7.90 more than is necessary to provide the required rate of return for the first six months.7 The $7.90 is regarded as a refund of a portion of the original premium, leaving a net investment (called the bond’s book value) of $1052.42 Ϫ $7.90 ϭ $1044.52 This......

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...use this information to make a profit? Explain. Q3) Suppose a bond is sold for $1,000 and pays an annual interest rate of 10% on the par value, which is also $1,000. The bond was issued 20 years ago and will mature in one week. You own some of these bonds. The yield on these bonds suddenly goes way up, to 15%. Calculate your loss. Explain your results? Q4) Suppose a bond has a par value of $1,000 and a market value of $1,100. It is convertible into 40 shares of stock, and the current stock price is $26. a. What is the conversion ratio? b. What is the conversion price? c. What is the conversion value? Q5) Suppose you buy a stock for $100. You receive $4 as a cash dividend at the end of the year. The stock price at the end of the year is $95. a. What is the rate of return on your investment? b. What is the dividend yield as measured at the beginning of the year? At the end of the year? Q6) The net asset value of a mutual fund is $12. The share price is $13. a. Is it an open-end fund or a closed-end fund? Calculate the premium or discount. Q7) Bill buys a $1000 par value 10-year bond for $850. It pays $75 a year in interest. Calculate Bill’s yield to maturity on the bond using a financial calculator or software. Q8) Alex holds a convertible bond with a market value of $1700. If the conversion ratio is 50 and the stock’s price is $39 per share, should he convert the bond or sell the bond? Q9) Classify each of the following types of assets as either......

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...use this information to make a profit? Explain. Q3) Suppose a bond is sold for $1,000 and pays an annual interest rate of 10% on the par value, which is also $1,000. The bond was issued 20 years ago and will mature in one week. You own some of these bonds. The yield on these bonds suddenly goes way up, to 15%. Calculate your loss. Explain your results? Q4) Suppose a bond has a par value of $1,000 and a market value of $1,100. It is convertible into 40 shares of stock, and the current stock price is $26. a. What is the conversion ratio? b. What is the conversion price? c. What is the conversion value? Q5) Suppose you buy a stock for $100. You receive $4 as a cash dividend at the end of the year. The stock price at the end of the year is $95. a. What is the rate of return on your investment? b. What is the dividend yield as measured at the beginning of the year? At the end of the year? Q6) The net asset value of a mutual fund is $12. The share price is $13. a. Is it an open-end fund or a closed-end fund? Calculate the premium or discount. Q7) Bill buys a $1000 par value 10-year bond for $850. It pays $75 a year in interest. Calculate Bill’s yield to maturity on the bond using a financial calculator or software. Q8) Alex holds a convertible bond with a market value of $1700. If the conversion ratio is 50 and the stock’s price is $39 per share, should he convert the bond or sell the bond? Q9) Classify each of the following types of assets as either......

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... a) Bond – is a long term contract under which the borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond. Treasury bonds – sometimes referred to as government bonds, are issued by the U.S. federal government. These bonds have not default risk. However, these bonds decline when interest rates rise, so they are not free of all risk Corporate bonds – issued by corporate; exposed to default risk – if the issuing company gets into trouble, it may be unable to make the promised interest and principal payments. Different corporate bonds have different levels of default risk, depending on the issuing company’s characteristics and the terms of the specific bond. Default risk often referred to as “credit risk” and the larger the default or credit risk, the higher the interest rate the issuer must pay. Municipal bond – or “munis “ are issued by state and local governments. Like corporate bonds, munis have default risk. Munis offer one major advantage over all the other bonds is exempt from federal taxes and also from state taxes if the holder is a resident of the issuing state. Munis bonds carry interest rates that are considerably lower than those on corporate bonds with the same default risk Foreign bond – are issued by foreign governments or foreign corporations. Foreign corporate bonds are of course exposed to default risk, and so are some foreign government bonds. An additional risk exists if the bonds are......

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...Property yields as tools for valuation and analysis Rosane Hungria-Garcia in collaboration with Hans Lind Björn Karlsson This report has been sponsored by the Real Estate Academy at the Division of Building and Real Estate Economics. Stockholm 2004 ______________________________________________________ Report No. 52 Building & Real Estate Economics Department of Infrastructure KTH Summary This project was started in order to get an overview of conceptual problems, measurement problems, theories of determinants of yields, the use of yields in different contexts and how the actors on the Swedish market looked upon yields. Important issues discussed in the report is the need for: - Conceptual clarity: A number of different yield terms exist on the market and it is very important to be clear about how the specific terms are defined. - Operational clarity: There are measurement problems both concerning rental incomes, operating and maintenance costs and property values. This means that reported yields can be “manipulated” by choosing suitable operationalisations and pushing estimations of uncertain factors in directions that are favourable to the actor in question. - Specify the purpose for which the yield should be used. The most important distinction is between using yields/income returns for valuation purposes and using yields as benchmarks or bubble indicators. In the first case various types of normalization of the net operating income can be rational. In the......

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...35174.82 1. You want to lease a new Taurus. The sticker is $20,000. Tax and title is $1250. The lease term is 3 years. The loan APR interest rate is 6%. The depreciation is 18% in year 1, 12% in year 2 and 10% in year 3. The cap cost reduction (increase in cost) is $500. CALCULATE LEASE PAYMENT NOTE: Depreciation is computed by taking the accumulated % depreciation over the least term (3 years in this case) and multiplying it times net investment (cost + tax & title + dealer prep + freight) P/Y = 12 N = 36 I/Y = 6 PV = -$21750 FV = 12000 SOLVE PMT= $354.84 2. Assume you negotiate the price on problem 1 to $19000. Tax and title are $1200. Cap cost is $500. You get financing at a good rate of 2.9%. CALCULATE NEW PAYMENT. PV = -$20700 I/Y = 2.9 FV=12000 N=36 SOLVE FOR PMT = $280.94 3. Lease a new Camry. Sticker $20,500. You negotiate price of $19500. Tax and title = $1300. Depeciation = 15% yr 1, 10% yr. 2 and 8% yr. 3. I/Y = 2.9%. Cap cost reduction is $500. CALCULATE LEASE PAYMENT. Residual = $13735 I/Y = 2.9 Cap cost reduction= $500 PV = -$21300FV = $13735 The Camry costs $500 more but the residual is $1174 higher (Foreign cars do not depreciate as much as U.S. cars) PMT = $252.25 (SAVINGS OF 10% even though the Camry cost more up front.) 4. Lease a Camry. Same facts as # 3 except I/Y = 8%. SOLVE FOR PMT. EXCEPT I/Y = 8 PV = -21300 FV = 13735 N = 36 SOLVE FOR PMT = $326.44 5. Same as 4. You trade in your old car......

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