公司理财chap5.pptx

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1、 Understand bond values and why they fluctuate Understand bond ratings and what they mean Understand the impact of inflation on interest rates Understand the term structure of interest rates and the determinants of bond yields5.1Bonds and Bond Valuation5.2More on Bond Features5.3Inflation and Intere

2、st Rates5.4Determinants of Bond Yields A bond is a legally binding agreement between a borrower and a lender that specifies the: Par (face) value(面值面值) Coupon rate(票面利率票面利率) Coupon payment(票面利息票面利息) Maturity Date(到期日到期日) The yield to maturity(到期收益率到期收益率) is the required market interest rate on the b

3、ond. Primary Principle: Value of financial securities = PV of expected future cash flows Bond value is, therefore, determined by the present value of the coupon payments and par value. Interest rates are inversely related to present (i.e., bond) values.TRTRPVIFFVPVIFACR,TT)(1FVRR)(11-1C Value Bond S

4、uppose a corporate issued a 5-year bond with 8% coupon on January 1 of 2013. The Par Value of the bond is $1,000. Coupon payments are made semi-annually (June 30 and December 31 for this particular bond). Since the coupon rate is 8%, the payment is $40. On January 1 of 2013 the size and timing of ca

5、sh flows will be:13/1/140$13/30/640$13/31/1240$17/30/640$17/31/12 On January 1, 2013, the required yield is 6%. How can we calculate the bond value?31.085, 1$000, 1$40$)03. 1 (000, 1$)03. 1 (11206.40$10%,310%,31010PVIFPVIFAPV Now assume that the required yield is 12%. What is the bonds value now?80.

6、852$000, 1$40$)06. 1 (000, 1$)06. 1 (11212.40$10%,610%,61010PVIFPVIFAPV Now assume that the required yield is also 8%. What is the bonds value now?04.1000$000, 1$40$)04. 1 (000, 1$)04. 1 (11208.40$10%,410%,41010PVIFPVIFAPVqBond prices and market interest rates move in opposite directions.qWhen coupo

7、n rate = YTM, price = par value (par bond)qWhen coupon rate YTM, price par value (premium bond)qWhen coupon rate YTM, price par value (discount bond) Suppose a firm were to issue a bond with 10 years to maturity. The face value of the bond is $1,000 and the annual coupon is $100. What is the value o

8、f the bond if the required market interest rate is 8%/10%/12%?When the required market interest rate is 8%1134100010010%,810%,80PVIFPVIFAPVWhen the required market interest rate is 10%1000100010010%,1010%,100PVIFPVIFAPVWhen the required market interest rate is 12%887100010010%,1210%,120PVIFPVIFAPV W

9、hat is the value of the bond 2 years after issuing?When the required market interest rate is 8%7 .111410001008%,88%,82PVIFPVIFAPVWhen the required market interest rate is 10%100010001008%,108%,102PVIFPVIFAPVWhen the required market interest rate is 12%90010001008%,128%,122PVIFPVIFAPVqWhen the requir

10、ed market interest rate is constant:qThe value of par bond will maintain unchanged.qThe value of premium bond will gradually decrease with the coming of maturity date. It = par value at maturity date.qThe value of discount bond will gradually increase with the coming of maturity date. It = par value

11、 at maturity date.qChange in price due to changes in interest rates:qAll other things being equal, the longer the time to maturity, the greater the interest rate risk.qAll other things being equal, the lower the coupon rate, the greater the interest rate risk. Suppose a firm has a bond with 20 years

12、 to maturity. The face value of the bond is $20,000. The bond makes no payments for the first six years, then pays $800 every six months over the subsequent eight years, and finally pays $1,000 every six months over the last 6 years. If the required return on the bond is 8% compounded semiannually,

13、What is the current price of the bond? Yield to maturity is the rate implied by the current bond price. Finding the YTM requires trial and error and is similar to the process for finding R with an annuity. Suppose we are interested in a 6-year, 8% coupon bond. The face value of the bond is $1000 and

14、 the price of the bond is $1115. What is the YTM of this bond?6 .6,1000801115iiPVIFPVIFA Current Yield = annual coupon / price Yield to maturity = Current yield + Capital gains yield Example: 10% coupon bond, with annual coupons, face value of 1,000, 20 years to maturity, $1,196.31 price Current yie

15、ld = 100 / 1196.31 = 8.36% Price in one year (assuming no change in YTM) = 1,192.06 Capital gains yield = (1192.06 1196.31) / 1196.31 =-.36% YTM = 8.36 - .36 = 8% Make no periodic interest payments (coupon rate = 0%) The entire yield to maturity comes from the difference between the purchase price a

16、nd the par value. Cannot sell for more than par value Sometimes called zeroes, deep discount bonds, or original issue discount bonds (OIDs)Information needed for valuing pure discount bonds: Time to maturity (T) Face value (F) Discount rate (r)TRFVPV)1 ( Present value of a pure discount bond at time

17、 0:00$10$20$1TF$TFind the value of a 30-year zero-coupon bond with a $1,000 par value and a YTM of 6%.11.174$)06. 1 (000, 1$)1 (30TRFVPV00$10$20$29000, 1$30 Not all bonds have a final maturity. British consols pay a set amount (i.e., coupon) every period forever. These are examples of a perpetuity.R

18、CPV Debt Not an ownership interest Creditors do not have voting rights Interest is considered a cost of doing business and is tax deductible Creditors have legal recourse if interest or principal payments are missed Excess debt can lead to financial distress and bankruptcy High Grade Moodys Aaa and

19、S&P AAA capacity to pay interest and principal is extremely strong Moodys Aa and S&P AA capacity to pay is very strong Medium Grade Moodys A and S&P A capacity to pay is strong, but more susceptible to the adverse effects of changes in circumstances and economic conditions Moodys Baa and S&P BBB cap

20、acity to pay is adequate, adverse conditions will have more impact on the firms ability to pay Low Grade Moodys Ba and B S&P BB and B Considered speculative with respect to capacity to pay Very Low Grade Moodys C and S&P C income bonds with no interest being paid S&P D in default with principal and

21、interest in arrears Treasury Securities国库券国库券 Federal government debt T-bills pure discount bonds with original maturity less than one year T-notes coupon debt with original maturity between one and ten years T-bonds coupon debt with original maturity greater than ten years Municipal Securities市政证券市

22、政证券 Debt of state and local governments Varying degrees of default risk, rated similar to corporate debt Interest received is tax-exempt at the federal level A taxable bond has a yield of 8%, and a municipal bond has a yield of 6%. If you are in a 40% tax bracket, which bond do you prefer? 8%(1 - .4

23、) = 4.8% The after-tax return on the corporate bond is 4.8%, compared to a 6% return on the municipal At what tax rate would you be indifferent between the two bonds? 8%(1 T) = 6% T = 25% Suppose the one-year interest rate is 15.5%. Imagine a pizza costs $5 today. Assume the inflation rate is 5%. If

24、 you have $100 today, how many pizzas can you buy today? If you deposit $100 in a bank, how many pizzas can you buy next year? Real rate of interest change in purchasing power Nominal rate of interest quoted rate of interest, change in purchasing power and inflation The ex ante nominal rate of inter

25、est includes our desired real rate of return plus an adjustment for expected inflation.The Fisher Effect The Fisher Effect defines the relationship between real rates, nominal rates, and inflation. 1 + R = (1 + r)(1 + h), where R = nominal rate r = real rate h = expected inflation rate Approximation

26、 R = r + hThe Fisher Effect: Example If we require a 10% real return and we expect inflation to be 8%, what is the nominal rate? R = (1.1)(1.08) 1 = .188 = 18.8% Approximation: R = 10% + 8% = 18% Because the real return and expected inflation are relatively high, there is a significant difference be

27、tween the actual Fisher Effect and the approximation. Term structure of interest rates is the relationship between time to maturity and yields, all else equal. It is important to recognize that we pull out the effect of default risk, different coupons, etc. Yield curve graphical representation of th

28、e term structure Normal upward-sloping, long-term yields are higher than short-term yields Inverted downward-sloping, long-term yields are lower than short-term yields Default risk premium remember bond ratings Taxability premium remember municipal versus taxable Liquidity premium bonds that have mo

29、re frequent trading will generally have lower required returns Anything else that affects the risk of the cash flows to the bondholders will affect the required returns.Quick Quiz How do you find the value of a bond, and why do bond prices change? What are bond ratings, and why are they important? H

30、ow does inflation affect interest rates? What is the term structure of interest rates? What factors determine the required return on bonds? Conclusion The bond yields represent the combined effect of no fewer than six factors. The first one is the real rate of interest. On top of the real rate are five premiums representing compensation for (1) expected future inflation, (2)interest rate risk, (3)default risk, (4)taxability, and (5)lack of liquidity.