Lecture 7 (chapter 6 & ?) Flashcards
What is a bond? And how does it work?
A bond is a type of security / asset given out by the government or corporations.
To sell (buy) a bond is like borrowing (lending) money.
A bond gives the issuer a promised cashflow today in exchange for promised future payments.
Maturity date?
The date when the last payment is made
What describes a bond?
Bond certificate, containing dates and timing of future payments
Two types of payments when buying / holding bonds:
- Regular periodic interest rate payments (CPN)
- At maturity, a nominal value called face value (FV)
Regular periodic interest?
Payed yearly or semiannually. Called a coupon (CPN)
Calculate CPN
CPN –> P = c * FV / k
c = coupon rate –> annual rate
k = antal coupon payments per år
ZCPN –> P = FV / 1+y –> (FV / P)^1/n - 1
y = rate of YTM
The most simplest bond?
Zero coupon bond.
Has no coupon rate which makes c = 0. Ända kostnaden är face value at the maturity.
YTM?
YTM yn for zero coupon bond?
Yielding to maturity. The rate that equates the future payments of a bond with the price.
Also called the spot interest rate.
Vad gäller YTM och IRR?
YTM in a bond = IRR in an investment of an bond
Alternative to YTM?
Yc (current yielding = aktuell avkastning)
Yc = C / P
The closer the price of a bond is to its face value, the better is Yc.
How to distinguish bonds? And how to determine price?
Par bond: P = FV
Premium bond: P > FV
Discount bond: P < FV
Par bond: CPN = y
Premium bond: CPN > y
Discount bond: CPN < y
Most bond issuers sets the price close to PAR.
Förhållande mellan price och YTM?
Högre pris = Lägre YTM
Lägre pris = Högre YTM
Calculate sensitivity of a bonds price to changes in interest
dP / dQ < 0
What does the sensitivity of a bonds price depend on also?
Depends on the maturity of the bond (löptiden)
Kort maturity –> lägre påverkan eftersom det finns färre framtida betalningar som påverkas
Synthetic bonds?
Portfolio of zero coupon bonds that the cash flows are identical to the cash flows of a given bond.
