Introduction to the Valuation of Debt Securities参考.ppt

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Coupon Bond Example Take a 3-year 10% coupon bond with face value = 1000, assuming annual coupon payments: Spot rates: r1=10%, r2=12%, r3=14% Yield-to-Maturity (IRR of cash flows) Zero Coupon Bond Example Price of 3-year zero coupon bond with face value = 1000 Spot rates: r1=10%, r2=12%, r3=14% Yield-to-Maturity Bond Valuation Using Treasury Spot Rates Exhibit 5 takes a 10-year, 8% semi-annual coupon bond and creates 20 zero-coupon bonds with different maturities. If given the spot rate (annual discount rate) for each maturity, it is possible to compute the individual present values of the 20 bonds. The summation of the present values is equal to the arbitrage-fee bond value. Exhibit 6 uses a 10-year, 4.8% coupon bond. Bond Valuation Bond Valuation Why Use Treasury Spot Rates Rather Than the Yield on an 8% 10-year Bond? Exhibit 7 takes the 10-year, 8% semi-annual coupon bond in the example and discounts all of the cash flows at 6% - the current yield for a 10-year bond. The present value is $114.8775 versus a present value of $115.2621 for the sum of the 20 zero-coupon bonds (discounted at the spot rates). The result of these different approaches would result in an arbitrage opportunity because it would be possible to buy the bond for $114.8775 and “strip” it to credit 20 zero-coupon bonds worth a combined $115.2621 The sum of present value of the arbitrage profits would be $0.384, which could amount to enormous profits for the arbitrageur. On tens of millions of dollars, this would be very profitable! Bond Valuation Use of Treasury Spot Rates Exhibit 8 and 9 show the opportunities for arbitrage profit. Note: in order to create profits for the 4.8% bond, it would be necessary to “reconstitute” stripped bonds. The process of stripping and reconstituting assures that the price of a Treasury will not depart materially from its arbitrage-free value. The Treasury spot rates can be used to