chapter 10 bond prices and yields. mcgraw-hill/irwin © 2004 the mcgraw-hill companies, inc., all...
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ChapterChapter 10 10
Bond Prices and Yields
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bond CharacteristicsBond Characteristics
Face or __________ value ___________for Corp. bonds)
__________________________________________________________Indenture
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Bond ValuationBond Valuation
The value (price) of a bond is the present value of future cash flows
Bond cash flows:◦____________________________________◦____________________________________
Discount rate:◦Cash flows are discounted at the __________
_________________________
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bond Prices and YieldsBond Prices and Yields
The yield to maturity (YTM) of a given bond is determined by market conditions and varies according to:
_________________________________________________________________________________Other features
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bond Prices and YieldsBond Prices and Yields
Prices and yields (required rates of return) are inversely related
When yields are high, bond price is low
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Yield to MaturityYield to Maturity
The YTM of a bond is the annual percentage return, based on the bond price if:◦ the bond is ____________________________◦all payments are ________________________◦coupon payments are ____________________
YTM is calculated as the “bond equivalent yield”
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Alternative Measures of YieldAlternative Measures of Yield
Effective annual yieldYield to Call
◦Call price replaces par◦Call date replaces maturity
Holding Period Yield (Realized compound yield)◦Considers actual reinvestment rate◦Considers any change in price if holding period
is less than maturity
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Premium and Discount BondsPremium and Discount Bonds
Premium Bond: price > par◦Coupon rate _________ than yield to maturity◦Bond price will ___________ to par over its life
Discount Bond: price < par◦Coupon rate _________ than yield to maturity ◦Bond price will ___________ to par over its life
Premium and Discount Bonds Premium and Discount Bonds over Timeover Time
Premium Bond
Par Bond
Discount Bond
Maturity
Price
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Default Risk and RatingsDefault Risk and Ratings
Rating companies◦Moody’s Investor Service◦Standard & Poor’s◦Fitch
Rating Categories◦Investment grade ______________________◦Speculative grade
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Factors Used by Rating CompaniesFactors Used by Rating Companies
Coverage ratiosLeverage ratiosLiquidity ratiosProfitability ratiosCash flow to debt