Lecture 5 bond valuation.pdf

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1、HOWTOVALUEBONDSANDSTOCKSBoSun012HowtoValueBondsandStocks?UseNetPresentValueApproach(NPV)tovaluebondsandstocks.FirstPrinciples:•Valueoffinancialsecurities=PVofexpectedfuturecashflowsTovaluebondsandstocksweneedto:•Estimatefuturecashflows:size(howmuch)andtiming(when)•Discountfuturecashflowsatanappropr

2、iaterateBondsStocksDividends+CapitalgainsAbondisacertificateshowingthataborrowerowesaspecifiedsum.•Zero-growth•Fixedprincipal•constant-growthFixedfuturecashflows•differentialgrowth3BondsandBondValuation•Abondisalegallybindingagreementbetweenaborrowerandalenderthatspecifiesthe:–Par(face)value–Coup

3、onrate–Couponpayment–MaturityDate•Requiredrateofreturn(marketinterestrateonthebond).4BondconceptITermtomaturity:numberofyearsthedebtisoutstandingorthenumberofyearsremainingpriortofinalprincipalpayment.Maturitydate:thedatethedebtwillceasetoexistatwhichtimetheissuerwillredeemthebondbypayingtheoutst

4、andingbalance.•short-term:1-5years•mid-term:5-12years•long-term:>12yearsBondConceptIIThepaymentatmaturityiscalledthebond’sfacevalue/principalvalue/par•soldatthefacevalue:price=par•soldatadiscount:priceparCouponrate:theinterestratetheissueragreestopayeachyearCoupon:thean

5、nualamountoftheinterestpaymentmadetobondholdersduringthetermofthebond:Coupon=couponrate*facevalueBondValuation•PrimaryPrinciple:–Valueoffinancialsecurities=PVofexpectedfuturecashflows•Bondvalueis,therefore,determinedbythepresentvalueofthecouponpaymentsandparvalue.•Interestratesareinverselyrelatedto

6、present(i.e.,bond)values.7TheBond-PricingEquation11-TF(1+r)BondValue=C+Tr(1+r)8BondExample•ConsideraU.S.governmentbondwithas63/8%couponthatexpiresinDecember2016.–TheParValueofthebondis$1,000.–Couponpaymentsaremadesemiannually(June30andDecember31forthisparticularbond).–Sincethecouponrate

7、is63/8%,thepaymentis$31.875.–OnJanuary1,2012thesizeandtimingofcashflowsare:$31.875$31.875$31.875$1,031.8751/1/126/30/1212/31/126/30/1612/31/169BondExample•OnJanuary1,2012,themarketinterestrateis5%.•Thecurr