Module 52: Fixed Income Bond Valuation Flashcards
(18 cards)
How do you calculat the value of a an annual coupon bond?
Discounting the present value of all the bonds cashed flows
What is the discount rate?
The rate of return required by investors given the risk of the bond
How do you workout bond values on the calculator?
N = Years ,PMT = Coupon Rate, FV = Par Value I/Y = yield = CPT PV
What do we do if we get a semiannual bond
Divide the Coupon payments by 2, Years need multiplying by 2
If you’re working out the I/Y, need to multiply by 2 at the end
What’s the relationship between a bond’s yield and it’s coupon rate?
If Coupon rate > Yield = will trade above par
If Coupon rate < Yield = will trade below par
What’s the constant yield trajectory?
Assuming Interest rates don’t change - if you have a bond that trades or a premium or discount, it will persist but overtime it will overide toward par value
What is a bonds yield to maturity?
Internal rate of return on the cashflows generated on the bond.
If we use YTM to discount all future cash flows from the investment, we will see the sum of the PVs from cash flows
Conditions necessary for the investor to earn their YTM
- Investor must hold the bond to maturity
- Coupons + Principal payments are recieved on time on scheduled dates
- All Coupons are reinvested at a rate equal to the YTM until maturity.
Why do Bond Prices & Yields inversely related?
If you pay a higher price of a bond, youll squeeze less of a yield off of it
What is the full price of a bond?
The price that actually needs to be paid
It’s Flat Price + Accrued Interest (AI)
How do you compute full price
- compute Flat bond price, from last coupon date
- Compute Full price at Settlement Date
- Full price x (1+YTM)^days since last period / days in coupon period
What is the flat price?
The price that you have to pay
How do you calculate accrued interest
Coupon payment * (Days since last coupon / days in coupon period)
How do you do it on the calculator
“nd Function + . , then 2nd Function + 9
SDT = Settlement Date
CPN = coupon payments
RDT = Maturity Date
RV = Par Value
ACT 2nd = 360
2/Y = Coupon payments a year
YLD = rate of return
CPT -> PRI = Flat Price, AI = Accrued interest, Full price =
What is the sensitivity of bond prices to changes of yields?
Bonds with higher coupons are less sensitivity to yield changes / Interest rate
Lower Coupon bonds are more sensitive to yield changes / interest rates
The most sensitive are zero coupon bonds
Why? Bond prices use cash flow discounting, with lower value coupons, there is more value in the final in the final payment, so it will be more sensitive to change when you’re discounting higher numbers e.g. raising to the power of …n
What is the sensitivity of bond prices to changes of yields?
Shorter maturity bonds have less sensitivity to yield changes than longer term bonds
(Exception): Long term bonds with low coupons (not zero) which trade at a discount, but will not necessarily be more sensitive
What is convexity?
T
he Price drop wouldb e
