FIN - Finance FIN 3301 Lecture Notes - Lecture 3: Effective Interest Rate, Compound Interest, Spot Contract

15 views1 pages

rosey1

10 Jul 2022

School

Texas State University

Department

FIN - Finance

Course

FIN - Finance FIN 3301

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Stock and bond valuation session 3: discount bond when r > coupon rate, premium bond when r < coupon rate, over time bonds prices converge to par value. If you find a periodic rate and you want to calculate equivalent bond equivalent rate you multiply by number of periods (to annualize you assume you can reinvest at the same rate). Never annualize rates for bonds because bonds are held for lt. Assumption for bonds is that the coupons won"t be reinvested. Instead of using maturity period you use first time of call. But in shorter time frames it can be higher. Ytc is calculated using fv as premium (call) price and call period, ytm is calculated using nominal value (1000$) and maturity. In general, ytc is higher than ytm: derivative products work on continuous compounding.

Related Questions

Bonds often pay a coupon twice a year. For the valuation of bonds that make semi-annual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and the number of periods, the valuation model is adjusted accordingly.

Assume that a $1000000 par value, semi-annual coupon U.S. Treasury note with 5 years to maturity (YTM) as a coupon rate of 6%. The yield to maturity of the bond is 11%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:

- $689825.45

- $973871.22

- $811559.35

- $511282.39

Base don your calculations and understanding of semi-annual coupon bonds, complete the following statement:

Assuming that interest rates remain constant, the T-notes's price is expected to _____.

ceruleanporpoise944

(A,Default/B,Reinvestment/C,Price) risk is the risk of a decline in a bond's value due to an increase in interest rates. This risk is higher on bonds that have long maturities than on bonds that will mature in the near future. (A,Default/B,Reinvestment/C,Price) risk is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio. This risk is obviously high on callable bonds. It is also high on short-term bonds because the shorter the bond's maturity, the fewer the years before the relatively high old-coupon bonds will be replaced with new low-coupon issues. Which type of risk is more relevant to an investor depends on the investor's (A,Investment Horizon/B,Default Period/C,Option Period), which is the period of time an investor plans to hold a particular investment. Longer maturity bonds have high (A,Reinvestment/B,Price/C,Exchange) risk but low (A,Reinvestment/B,Price/C,Exchange) risk, while higher coupon bonds have a higher level of (A,Reinvestment/B,Price/C,Exchange) risk and a lower level of (A,Reinvestment/B,Price/C,Exchange) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called (A,Correlation/B,Duration/C,Signaling) , which is the weighted average of the time it takes to receive each of the bond's cash flows. Conceptual Question: Which of the following bonds would have the largest duration? A)10year-zero coupon bonds B)10year-7% annual coupon bonds C)10year-3% annual coupon bonds D)5year-3% annual coupon bonds E)3year-7% annual coupon bonds

yellowsalmon252

You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually, YTM=9% C. 15-year maturity, 4% coupon paid annually, YTM=9% To pick the best one, you want to calculate the following:

1) What are the current prices of three bonds based on the initial YTM given? [2 points]Current prices of all bonds are shown below Bond 1: n=5; PMT = 6; YTM = 9%; FV = 100; PV=calculate = 88.33 It can be calculated by putting the values in the financial calculator OR by using the PV formule in excel which is =PV(9%,5,6,100) Bond 2 n=10; PMT = 8; YTM = 9%; FV = 100; PV=calculate = 93.58 Bond 3 n=15; PMT = 4; YTM = 9%; FV = 100; PV=calculate = 59.7

2) If the coupon payments are reinvested at the prevailing market rate (7% for the coming 5 years), what are the future values (at the end of the fifth year) of all five coupon payments for three bonds respectively? [3 points]

3) What are the selling prices of three bonds at the end of the fifth year, given that the prevailing market rate is 8% at that time? (For bond A, use its par value as the final selling price, as it will mature in 5 years). [2 points]

4) What are the HPRs for the three bonds? [2 points] 5) Whatâs your recommendation? [1 point]

yellowcaribou187

FIN - Finance FIN 3301 Lecture Notes - Lecture 3: Effective Interest Rate, Compound Interest, Spot Contract

Document Summary

Get access

Related Documents

FIN - Finance FIN 3301 Lecture Notes - Lecture 2: Reinvestment Risk, Credit Risk, Liquidity Risk

FINA 385 Chapter 12: Bodie_7e_12.doc

RSM332H1 Chapter Notes - Chapter 6: Yield Spread, Liquidity Preference, Corporate Bond

Related Questions