Time Valuation Of Money

In Relation To Bond

Valuation

• The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time

• Standard calculations based on the time value of money are:-

1 :- Present value

2 :- Present value of an annuity

3 :- Present value of a perpetuity

4 :- Future value

5 :- Future value of an annuity

Introduction

It is important for prospective bond buyers to know how to determine the price of a bond

•Bonds can be priced at a premium, discount, or at par .•Formula for calculating a bond's price :-

C = coupon payment 

n = number of payments 

I = interest rate, or required yield 

M = value at maturity, or par value 

 

Bond Pricing

Advanced Bond Concepts

• Bond valuation Process

• Present value relationship

• Clean and dirty price

• Bond Pricing

• When a bond sells at a discount, YTM > current yield > coupon yield.

• When a bond sells at a premium, coupon yield > current yield > YTM.

• When a bond sells at par, YTM = current yield = coupon yield amt

Relationship

• Bond Issuers 

•Priority 

•Coupon Rate 

Price Sensitivity

• Yield and Bond Price

• Term Structure of Interest Rates

• Yield and price relationships

• Yield to Maturity

• Coupon yield

• Current yield

Unlimited Type Of Bond

• As its name indicates, this is the yield curve shape that forms during normal market conditions, wherein investors generally believe that there will be no significant changes in the economy, such as in inflation rates, and that the economy will continue to grow at a normal rate.

Normal Yield Curve

• These curves indicate that the market environment is sending mixed signals to investors, who are interpreting interest rate movements in various ways.

Flat Yield Curve

• These yield curves are rare, and they form during extraordinary market conditions wherein the expectations of investors are completely the inverse of those demonstrated by the normal yield curve.

Inverted Yield Curve

• Unfortunately, the basic yield curve does not account for securities that have varying coupon rates.

Theoretical Spot Rate Curve

• The credit spread, or quality spread, is the additional yield an investor receives for acquiring a corporate bond instead of a similar federal instrument.

The Credit Spread