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.
Corporate bonds?
Bonds issued by corporations to raise funds for investments.
Not assumed to be risk-free compared to government bonds.
Worth less than government bond due to credit risk.
Credit risk?
The risk that the corporation is unable to pay the future payments due to bankruptcy.
BOND RATING
Räkna ut coupon rate
CPN * Antal coupon rates betalningar per år / FV
