PowerPoint Presentation… the market price of a bond on any date
After completing this chapter, you will be able to:
… the yield to maturity of a bond on any interest payment date
Calculate
Face Value (or denomination)
… the principal amount that the issuer is required to pay to the bond holder on the maturity date
… interest rate paid on face value
… rate normally fixed for life of bond
… paid semiannually
Main Characteristics
15 - *
… are fixed Income investments i.e. they have a fixed interest rate or coupon payable on the principal amount
Main Characteristics
… the issue date is the date on which the loan was made and on which interest starts to accrue
… a bond is basically a loan used to raise funds for the organization or institution, e.g. CSB’s, Municipalities…
… borrower is required to make periodic payments of interest only
Basic Concepts & Definitions of
Main Characteristics
… on the maturity date of the bond, the full principal amount is repaid along with the final interest payment
… issued with maturities ranging from 2 to 30 years
Basic Concepts & Definitions of
same characteristics as Marketable Bonds?
Canada Savings Bonds
Marketable Bonds
You can cash in a CSB before its scheduled maturity date and receive the full face value plus accrued interest
You cannot do this with a M B
If you want to cash in before it matures, you must do this through an investment dealer in the “bond market”
McGraw-Hill Ryerson©
15 - *
If the market rate falls below the coupon rate, the bond’s price rises above its face value
If the market rate rises above the coupon rate, the bond’s price falls below its face value
CouponRate
Market Rate
Bond Price
Market Rate
Bond Price
McGraw-Hill Ryerson©
FV = Face Value of the bond
Effects of Interest Rate Changes on Bond Prices
Fair Market Value of a Bond
Present Value of the Interest Payments
Present Value of the Face Value
Bond Price = b(FV)
15 - *
A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, 2018. Interest is paid semi-annually. On September 1, 2002, the prevailing interest rate on long-term bonds abruptly rose from 6% to 6.2% compounded semi-annually. What were the bond's prices before and after the interest rate change?
The semi-annual interest paid on the bond is
b(FV) = 0.033 ($5,000) = $165
15.5 years remain until maturity
n = 15.5 * 2 = 31
5000
PV = -5300.01
A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, 2018. Interest is paid semi-annually. On September 1, 2002, the prevailing interest rate on long-term bonds abruptly rose from 6% to 6.2% compounded semi-annually. What were the bond's prices before and after the interest rate change?
2
PV = -5197.38
= $128.51
A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, 2018. Interest is paid semi-annually. On September 1, 2002, the prevailing interest rate on long-term bonds abruptly rose from 6% to 6.2% compounded semi-annually. What were the bond's prices before and after the interest rate change?
McGraw-Hill Ryerson©
15 - *
The bond’s yield-to-maturity is the discount rate that makes the combined…
Calculating the Yield-to-Maturity of a Bond
PV of all remaining interest payments
and the Face Value
LO 2.
McGraw-Hill Ryerson©
Calculating the Yield-to-Maturity of a Bond
A $1,000 face value Province of Manitoba bond, bearing interest at 5.8% payable semiannually, has 11 years remaining until maturity. What is the bond’s yield to maturity (YTM) at its current market price of $972?
2
29
22
1000
972
PMT = 1000*5.8%/2
Interest Payment Dates
A $1,000, 20 year, 6% coupon bond was issued on August 15, 2000. It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?
Calculate the PV of the remaining payments on the preceding interest payment date.
Calculate the FV of the Step 1 result on the date of sale.
McGraw-Hill Ryerson©
2
30
36
1000
6.5
On August 15, 2002, the bond’s value is $947.40
Most recent interest payment date is August 15, 2002
PMT = 1000*6.0%/2
A $1,000, 20 year, 6% coupon bond was issued on August 15, 2000. It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?
McGraw-Hill Ryerson©
Calculate the FV of $947.40 on Nov.3, 2002
We need to find:
b) # of days from Aug.15 to Nov.3
P/Y = 2
P/V = -947.40
A $1,000, 20 year, 6% coupon bond was issued on August 15, 2000. It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?
McGraw-Hill Ryerson©
DBD = 80
DBD = 184
0
.4348
947.40
N = 80/184
FV= 960.67
A $1,000, 20 year, 6% coupon bond was issued on August 15, 2000. It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?
McGraw-Hill Ryerson©
15 - *
http://www.finpipe.com/fixed.htm
This site provides complete details on how bonds function. Just click on the areas that the site provides for information.
Click here:
McGraw-Hill Ryerson©