Bond Valuation Flashcards
How do you value “any asset”?
To value any asset, discount expected future cash flows back to present at an appropriate, risk-adjusted rate.
How do you value “any asset”?
To value any asset, discount expected future cash flows back to present at an appropriate, risk-adjusted rate.
What are the two cash flows associated with a bond called?
Coupon payments Maturity payment
What is the maturity payment?
The payment that occurs at the maturity of the bond. It is the face value of the bond.
What is the maturity payment?
The payment that occurs at the maturity of the bond. It is the face value of the bond.
What is the valuation formula for a zero coupon bond?
V=Cashflow/(1+kd)^T kd is the risk adjusted rate The cashflow is the maturity payment T is the time of the maturity payment
What is another name for a bond’s IRR
It’s “yield-to-maturity”
What is the formula for the asked-yield of a treasury bill?
Asked-Yield = (365/days-to-maturity)*IRR
What is the formula for the asked-yield of a treasury bill?
Asked-Yield = (365/days-to-maturity)*IRR
In the US, how often are coupons typically paid on a bond?
Semi-Annually
If a bond pays coupons at 10% and has a face value of $100, how much does it pay each year?
$10 In the U.S. this would be $5 twice a year.
What is the value formula for a coupon bond?
B0=C*ADF(kd,maturity)+face_value/(1+kd)^maturity
What is the value formula for a coupon bond?
B0=C*ADF(kd,maturity)+face_value/(1+kd)^maturity
What does it mean for a bond to be trading at a premium?
The bond is trading at a rate that is above its face value
What does it mean for a bond to be trading at a discount?
The bond is trading at less than its face value
If a bond is trading at its face value, what would we call it?
Trading at par
What is the general formula for pricing any bond?
If required interest rates increase bond price will…
Decrease
What is interest rate risk?
Risk associated with losing value on a bond because the required interest rate in the market goes up.
Because of the fact that this change happens at different points on the timeline the overall average return (if held to maturity) may be different than the true return due to time value of money.
Are low or high coupon bonds more sensitive to interest rate risk?
Low coupon bonds are more sensitive.
Because the maturity payment of the bond is further out compared to coupons, it is more sensitive to changes in the interest rate. When a bond has low coupons, more of its value is tied to that maturity payment and thereby it is more sensitive to interest rate changes.
Are long maturity or short maturity bonds more sensitive to interest rate risk?
Long maturity
Because long maturity bonds have more compounding periods ahead of them, changes in interest rates have a larger impact.
If a bond has a discount of 0.6 what is its interest rate?
0.6%
