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 McGraw-Hill/Irwin   Copyright © 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!

Bond Prices and Yields

10Bodie, Kane, and MarcusEssentials of Investments,

9th Edition

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10.1 Bond Characteristics

•Bond• Security that obligates issuer to a!e "ayents to

holder o#er tie

•$ace %alue, Par %alue• Payent to bondholder at aturity o& bond

•Cou"on 'ate• Bond(s annual interest "ayent "er dollar o& "ar

#alue•)ero*Cou"on Bond

• Pays no cou"ons, sells at discount, "ro#ides only

"ayent o& "ar #alue at aturity

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$igure 10.1 Prices+Yields o& .S. -reasury Bonds

Maturity Coupon Bid Asked ChangeAsked Yield

+1/+01 1./0 101./0 101./92 *0.013 0.1/1

+1/+012 2./0 111./2 111./92 *0.092 0.4/

1+41+01/ .1/ 10/.9 10/.0 *0.132 0.39

+1/+01 2./0 10.19 10.33 *0.42 1.42

+1/+00 ./00 1/.034 1/.092 *0.422 1.2

+1/+04 3./0 14.203 14.24 *0.3 ./9

+1/+0 3.3/ 12/./2 12/./92 *0.19 .921

+1/+041 /.4/ 140.33 140.9 *0.9/4 4.34

11+1/+049 2.4/ 111.33 111.14 *0.14 4.39

/+1/+021 2.4/ 111.19 111./0 *0.94 4.1

U.S. Treasury Quotes: -reasury note and bond data are re"resentati#eo#er*the*counter 5uotations as o& 4" Eastern tie.

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10.1 Bond Characteristics

•  

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10.1 Bond Characteristics

• Cor"orate Bonds• Call "ro#isions on cor"orate bonds

• Callable bonds6 May be re"urchased by issuer

at s"eci&ied call "rice during call "eriod• Con#ertible bonds

• 7llo8 bondholder to echange bond &or

s"eci&ied nuber o& coon stoc! shares

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10.1 Bond Characteristics

• Cor"orate Bonds• Puttable bonds

• :older ay choose to echange &or "ar #alue

or to etend &or gi#en nuber o& years• $loating*rate bonds

• Cou"on rates "eriodically reset according to

s"eci&ied ar!et date

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10.1 Bond Characteristics

• Pre&erred Stoc!• Coonly "ays &ied di#idend

• $loating*rate "re&erred stoc! becoing ore

"o"ular • ;i#idends not norally ta*deductible

• Cor"orations that "urchase other

cor"orations( "re&erred stoc! are taed on

only 40< o& di#idends recei#ed

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10.1 Bond Characteristics

• =ther ;oestic >ssuers• State, local go#ernents ?unici"al bonds@

• $ederal :oe Aoan Ban! Board

• $ar Credit agencies• innie Mae, $annie Mae, $reddie Mac

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10. Bond Pricing

 

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10. Bond Pricing

• Prices &all as ar!et interest rate rises• >nterest rate &luctuations are "riary source

o& bond ar!et ris!

• Bonds 8ith longer aturities ore sensiti#eto &luctuations in interest rate

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-able 10. Bond Prices at ;i&&erent >nterest 'ates

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$igure 10.4 >n#erse 'elationshi" bet8een Bond Prices and Yields

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10. Bond Pricing

• Bond Pricing bet8een Cou"on ;ates• >n#oice "rice $lat "rice D 7ccrued interest

• Bond Pricing in Ecel

• P'>CE ?settleent date, aturity date, annualcou"on rate, yield to aturity, rede"tion #alue

as "ercent o& "ar #alue, nuber o& cou"on

"ayents "er year@

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S"readsheet 10.1 %aluing Bonds

6.25 !oupon"ond# $.%&5 !oupon "ond#

'!oupon"ond#

(aturingAugust )5#

2*2% +or(ula in !olu(n B (aturing ,o- )5# 2*%%*/year(aturity

Settle(ent date '0)502*)) 1AT342*))#'#)5 '0)502*)) )0)02***

Maturity date '0)502*2% 1AT342*2%#'#)5 ))0)502*% )0)02*%*

Annual !oupon rate *.*625 *.*$%&5 *.*'

 Yield to (aturity *.*25' *.*%6& *.)

ede(ption -alue 4 o7 7a!e -alue )** )** )**

Coupon pay(ents per year 2 2 2

+lat pri!e 4 o7 par )%&.$$$ 189C34B$#B5#B6#BB'#B ))).') ').*&)

ays sin!e last !oupon * 1CU8AYBS4B$#B5#2#) 2 *

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10.4 Bond Yields

• Yield to Maturity• ;iscount rate that a!es "resent #alue o&

bond(s "ayents e5ual to "rice.

• Current Yield• 7nnual cou"on di#ided by bond "rice

• Preiu Bonds• Bonds selling abo#e "ar #alue

• ;iscount Bonds• Bonds selling belo8 "ar #alue

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S"readsheet 10. $inding Yield to Maturity

Se(iannual!oupons

Annual!oupons

Settleent date 1+1+000 1++000

Maturity date 1+1+040 1++040 7nnual cou"on rate 0.0 0.0

Bond "rice ?&lat@ 1.33 1.33

'ede"tion #alue ?< o& &ace #alue@ 100 100

Cou"on "ayents "er year 1

Yield to aturity ?decial@0.0300 0.0/99

-he &orula entered here is Y>EA;?B4,B2,B/,B3,B,B@

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10.4 Bond Yields

• Yield to Call• Calculated li!e yield to aturity

• -ie until call re"laces tie until aturity call

"rice re"laces "ar #alue• Preiu bonds ore li!ely to be called than

discount bonds

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$igure 10.2 Bond Prices6 Callable and Straight ;ebt

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10.4 Bond Yields

• 'ealiFed Co"ound 'eturns #ersus Yield to

Maturity

• 'ealiFed co"ound return

• Co"ound rate o& return on bond 8ith all cou"ons

rein#ested until aturity• :oriFon analysis

• 7nalysis o& bond returns o#er ultiyear horiFon, based

on &orecasts o& bond(s yield to aturity and in#estent

o"tions• 'ein#estent rate ris!

• ncertainty surrounding cuulati#e &uture #alue o&

rein#ested cou"on "ayents

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$igure 10./ ro8th o& >n#ested $unds