finance lec 6 - valuing bonds and shares Flashcards
what is a issuer/borrowe
person who issues/sells bond
what is the purpose of a bond
borrowing money today for the purpose of future payments
who is responsibble for future payments of the bond
isssuer
what is issue date
date bond 1st issued to the market
bonds are issued for the first time by the borrower in which market
primary market
when issued for fisrt time in primary markets how does issuer receive money
directly from investors
maturity date
latest date the owner of the bond can claim teh cashflows associated with the bond
what is a tenor
a fixed measure of time over which you as the issuer have the commitment to make these payments
how do we calculate the tenor
maturity date - issue date
how do we describe the tenor
fixed
what does tenor being fixed mean
no matter the point in time youre standing this is still the length of how long cf paid for
time to maturity
time left until maturity
what can time to maturity do
change
why can time to maturity change
as time goes on time to maturity decreases
principal value aka what 3 other names
par
face
nominal
what is the principla value
what you pay at issue date and the maturity of the bond
most bonds issued in multiples of
10
when a bond first issued what value is it issued at
nominal
after bond is issued value becomes a function of the
interest rate
we dont care too much about the face value unless
it was bought on the issue date
cause that’s not what you pay if you buy bond after the issue date
interest /coupon rate
reward you get on investment
coupon rates are always expressed in x terms but payments may not always be made x
annual terms
annually
are coupon rates fixed or floating
fixed
in this unit what kind of payment do we assume
annual
coupon payment equation
coupon rate x face value
space
what is the owner of a bond entitled to
a fixed set of cash payments in the future
owner is known as
bond holder/lender
what is a redeemable bond
bond where at maturity you get the nominal value
what is an iredemmable bond
bond where we only receive coupon repayment but never receive the face value
iredeemable bonds are very
rare
how many streams of cf do we have when we talm bout a bond
annual cf of coupon rate all years till maturity - interest paid annually during life of bond
single cf of nominal value - principal repaid on redemption redeemable bond
value of bond =
value of future cf in PV
If someone is promising us £100 a year from now what are we willing to pay
PV of future cf based on appropriate DR
pay a price less than this - great as paying less than getting so positive NPV
if someone promising us £100 a year from now what are we NOT willing to pay
A higher price than PV of future cf as we’ll be destroying value paying more than we are getting
what is valuation when we talking about time money
PV of future CF
If the rate used to calculate the value is equal to the market rate what does this mean
value will be that of the market value
what are the columns when working out the bond repayment
at issue
y1
y2
y3
y4
etc
what are the rows when working out the bond repayment
bondholder pays (company recieves)
bondholder recieves (company pays )
bondholder recieves (copmpany repays
what are the 3 steps to working out bonds
layout cf associated w bond - issue date that the company pays
once own bond entitled to future cf - continue to recieve this till last year
at end of life of bond - recieve nominal val of bond so copmany pays nominal value
what is differnce between bond and loan cause they pretty similar
bodns are tradeable in exchanges
when can you buy and sell bonds
at any point during till maturity - clariy
observation – present value of cashflows
if a 5% coupon rate vond at time of date issued is 100 qhat does this mean teh DR is
5%
or 5% is the reward ?
if our return is 5% and our discount rate is 3% what can we expect
the value we will end up with is greater than 100
as we gettting rewarded w 5% but only getting dicountes by 3 %
discount is less than getting rewarded/returned/par value - so expected bigger valuei
if ROR is 5% and DISCOUNT RATE is 8% what can we expect
That par value will be less than return
becausse we getting reward w 5& but getting disocunted much larger
the bond value will be less if dicosint rate is greater than coupon rate
if bond valued at a greater than par value the bond is bing traded ata
premium
if bond valued at a lower than par value it is bing traded at a
discount
if we see discount rate is greater than coupon rate what can we expect
lower thn par value bond
a £5 regualr payment for bond cna be considered an
annuity
why can a £5 regular payment for a bond be consdierd an annuity
as its a fixed , regular frequency payment for a limited POT
So when working out PV of bond what should we do aka formula
AF
Payment/cf * AF + Discount factor
(coupon rate/interest paid * AF) + (prinicpal repaid x DF )
how do we estimate that our PV of bond calculation is correct
check if discount rate higher or lower than the coupon rate
and then see if the umber below or above pr value
bond value
what do we use to get the market price
market rate
what is todays mkt value =
PV of future cf disocunted at market rate of inteerest
if the mkt rate is 3% a bond payingna greater than coupon rate what do we expext
higher than it nominal value
YTM
Yield to maturity aka
ROR
cost of capital
reward
ir
what is YTM
rate of return investor will earn
if the bond is held to maturity or
*Rate that sets PV of future cf = mkt price of bond
YTM aka
bond holders expected rate of return
what do we need to w/o YTM
coupon
nominal value
time to maturity
current market value
YTM =
DR = PV of futrre cashflows w current market price of the bond
YTM aka the what of cashflows
IRR
when we talkign about bonds what do we say instead of yield
return
what dotwo rates do we need when calcualting IRR
rate that give us -ve NPV
rate that gives us +ve NPV
TAKING CF INTO ACCOUTN
IRR CALCULATION
r1+ IRR1/IRR1 - IRR2 * (r2-r1)
how do we work out out current yield
coupon payment/ current market price of bond
actual coupon payment as in 1000 * 8%
how do we work out coupon rate
coupon payment / nominal value of bond
when would you not care aobut the nominal pruice and what do you care about instead
unless you ought bond when 1st issued
as you dont pay for nominal price you pay for the market price
teh current yield (or amybe coupon yield) doesn’t take into account
capital gained or lsot in sale
what takes into account capital gained or lost
total yield
how do we work out total yield
coupon recieved + capital gained(or lsot)from sale of bond/ initial investment
(*100)
do we neeed more fc ?
