Microsoft PowerPoint - PoF.ppt

CharacteristicsThe main aspects that can be set in a bond contract:ƒ 101 Face value (FV) / principal / par value: original value ...

Characteristics 102 ƒ Zero-coupon bonds / pure discount bonds: pay no coupons prior to maturity and pay the face value at maturi ...

Characteristicsƒ 103 Maturity (T): date when (or time until) the bond expires (or matures); maximum length of time the borrower ...

Characteristicsƒ 104 Bond covenants / “me first rules”: help to protect bondholders from the moral hazard of equity holders! ƒ A ...

Characteristics 105 ƒ Financial ratio covenants: if a target ratio is not met the firm is technically in default, e.g. workin g ...

Characteristicsƒ 106 Embedded options: options included in bond contracts ƒ NOTE: The embedded options have a price! ƒ Freely .. ...

Bond marketsƒ 107 Domestic bond market ƒ Most issues are listed at an exchange ƒ BUT most trading takes place over-the-counter ( ...

Bond marketsƒ 108 The 5 most important markets for bonds Total value [billion USD], 1997 United States 11,218 Japan 4,173 German ...

Bond marketsƒ 109 Distribution of bonds according to type of issuer, 1997 US [%] Japan [%] BRD [%] Government 25 43 23 Federal ( ...

Valuation... simply compute the 110 present value of the promised future CF streams (effective periodic interest rate = simple p ...

Examplesƒ 111 What is the current market price of a US Treasury strip that matures in exactly 5 years and has a face value of $ ...

Examplesƒ 112 What is the market price of a US Treasury bond that has a coupon rate of 9% p.a., a face value of $1000 and mature ...

Valuationƒ 113 Yield-to-maturity (y) / internal rate of return (IRR): (constant) discount rate that makes the discounted value o ...

Quotesƒ 114 Selling at par : PV = FV ƒ Selling at a discount : PV < FV ƒ Selling at a premium : PV > FV ƒ What can you inf ...

Ratingƒ 115 ... expected return on a loan Ÿ agreed interest rate ƒ Measurement of credit risk: ratings; a bond rating is a quali ...

Rating 116 ƒ ƒ Rating review: upgrade, downgrade (to BB+ / Ba1 or lower “fallen angel”) ƒ Junk bonds / high yield bonds ... bond ...

Market riskƒ 117 ... risk about the uncertainty of interest rate changesƒ If interest rates rise, the price of bonds will fall ƒ ...

Taylor series expansionƒ 118 Risk indications for bonds ƒ Taylor series Ä approximate price change, given changes in the YTM ( ) ...

Taylor series expansion 119 ƒ Duration ... how sensitive the price is to changes in the yield; %-change in the price fo r a give ...

Taylor series expansion 120 ƒ Convexity Duration for a (straight) coupon / bullet bondk ... number of periods (CFs) per yearP .. ...