公司金融课件 5 bond II.docVIP

BOND RISK There is a general misconception that bonds are secure and riskless investments. Types of risks: Interest-rate risk If interest rates rise, the value of a bond can fall greatly. Default risk If a company or developing country cannot pay either the interest or the principal at the maturity date, the value of the bond can even fall to zero. Liquidity Risk Some bond issues, particularly for corporations or provincial governments, are relatively small---perhaps only $50 or $100 million. As a result, there may be relatively few of the bonds traded over any period. Consequently, if you owned such bonds and wished to sell, a very “thin” market may require the bonds to be sold at a discount relative to other similar bond issues that trade more. The potential that they would sell at a discount is an added risk. Currency risk While we won’t discuss currency issues to any extent, a bond denominated in another currency may have its value fall dramatically with a devaluation of that currency. INTEREST RATE RISK Example: Long-term Bond You own a 30-year bond with a 10% coupon paid annually. If the current market interest rate for such a bond is 10%, its value is: PV = 100 * PVIFA10%,30 + 1,000 * PVIF10%,30 PV = 942.69 + 57.31 = 1,000 If the current market interest rate rose dramatically to 15%. What’s the value of the bond now? The PV of the bond has fallen by 32.8%. Example: Short-term Bond You own a 1-year bond with a 10% coupon paid annually. If the current market interest rate for such a bond is 10%, its value is: PV = 100/1.1 + 1,000/1.1 PV = 90.91 + 909.09 = 1,000 Suppose the current market interest rate for a similar bond rose dramatically to 15%. What’s the value of the bond now? The PV of the short-term bond has fallen by 4.5%. That’s a much lower level of interest rate risk than with the longer-term bond. Example: Low Coupon Bond You own a 20-year bond with a 6% coupon paid annually. If the current market interest rate for such a bond is 10%, it