Bonds and Their Valuation参考.ppt

* * * * * * * * * * * * * * * * * * * * * * * * * * * The semiannual bond’s effective rate is: Excel: =EFFECT(.10,2) = 10.25% 10.25% 10% (the annual bond’s effective rate), so you would prefer the semiannual bond. Would you prefer to buy a 10-year, 10% annual coupon bond or a 10-year, 10% semiannual coupon bond, all else equal? 7-* If the proper price for this semiannual bond is $1,000, what would be the proper price for the annual coupon bond? The semiannual bond has a 10.25% effective rate, so the annual bond should earn the same EAR. At these prices, the annual and semiannual bonds are in equilibrium. Excel: =PV(.1025,10,100,1000) 7-* INPUTS OUTPUT N I/YR PMT PV FV 10 -984.80 100 10.25 1000 A 10-year, 10% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,050, what is its yield to call (YTC)? The bond’s yield to maturity is 8%. Solving for the YTC is identical to solving for YTM, except the time to call is used for N and the call premium is FV. Excel: =RATE(8,50,-1135.90,1050) 7-* INPUTS OUTPUT N I/YR PMT PV FV 8 -1135.90 50 3.568 1050 Yield to Call 3.568% represents the periodic semiannual yield to call. YTCNOM = rNOM = 3.568% x 2 = 7.137% is the rate that a broker would quote. The effective yield to call can be calculated. YTCEFF = (1.03568)2 – 1 = 7.26% Excel: =EFFECT(.07137,2) = 7.26% 7-* If you bought these callable bonds, would you be more likely to earn the YTM or YTC? The coupon rate = 10% compared to YTC = 7.137%. The firm could raise money by selling new bonds which pay 7.137%. Could replace bonds paying $100 per year with bonds paying only $71.37 per year. Investors should expect a call, and to earn the YTC of 7.137%, rather than the YTM of 8%. 7-* When is a call more likely to occur? In general, if a bond sells at a premium, then (1) coupon rd, so (2) a call is more likely. So, expect to earn: YTC on premium bonds. YTM on par and discount bonds. 7-* Default Risk If an issuer defaults, investors receive