《金融市场与机构 Jeff Madura》ch08.pptVIP

8 Bond Valuation and Risk Chapter Objectives Demonstrate how bond market prices are established and influenced by interest rate movements Identify the factors that affect bond prices Explain how the sensitivity of bond prices to interest rates is dependent on particular bond characteristics Explain the benefits of diversifying the bond portfolio internationally Bond Valuation Process Bonds are debt obligations with long-term maturities issued by governments or corporations to obtain long-term funds Commonly purchased by financial institutions that wish to invest funds for long-term periods Bond price (value) = present value of cash flows to be generated by the bond Bond Valuation Process Impact of the Discount Rate on Bond Valuation Discount rate = market-determined yield that could be earned on alternative investments of similar risk and maturity Bond prices vary inversely with changes in market interest rates Cash flows are contractual and remain the same each period Bond prices vary to provide the new owner the market rate of return Bond Risks and Prices Higher risk Higher discount rates Lower bond prices Lower risk Lower discount rates Higher bond prices Bond Valuation Process Bond Price = present value of cash flows discounted at the market required rate of return C = Coupon per period (PMT) Par = Face or maturity value (FV) i = Discount rate (i) n = Compounding periods to maturity Bond Valuation Process Consider a $1000, 10% coupon (paid annually) bond that has three years remaining to maturity. Assume the prevailing annualized yield on other bonds with similar risk is 12 percent. Calculate the bond’s value. The expected cash flows of a coupon bond includes periodic interest payments, and… A final $1000 payoff at maturity Discounted at the market rate of return of 12% Bond Valuation Process PV = $100/(1+.12)1 + $100/(1+.12)2 + $1100/(1+.12)3 = $951.97 Bond Valuation Process PV = $100/(1+.12)1 + $100/(1+.12)2 + $1100/(1+.12)3 = $951.