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2
Ý Introduction
Ý Bond Returns
coupon rate
current yield
spot interest rate
yield to maturity
yield to call
Ý Bond Prices
Ý Bond Pricing eorems
Ý Bond Risks
Ý Bond Duration
u
IR DU2I
Ý Bonds are Long-term fixed income
securities. Debentures are also long-term
fixed income securities. Bot of tese are
P .
B D RUR (2 .)
Ý 2URR YILD-
e current market price of a bond in te secondary
market may differ from its face value.
e current yield relates te annual interest
receivable on a bond to its current market price. It can
be expressed as follows-
~
Were
In = Annual Interest
Po = 2urrent market price
O
B D RUR (2 .)
Ý P IR RA-
-ero coupon bond is a special type of bond wic does
not pay annual interests.
è
B D RUR (2 .)
Ý YILD MAURIY (YM)-
is is te most widely used measure of
return on bonds.
It may be defined as te compounded rate of
return an investor is expected to receive
from a bond purcased at te current
market price and eld to maturity.
It is really te internal rate of return earned
from olding a bond till maturity.
YM depends upon te cas outflow for
purcasing te bond, tat is, te cost or
[
B D RUR (2 .)
2urrent market price of te bond as well as te
cas inflows from te bond, namely te future
interest payments and te terminal principal
repayment.
YM is te discount rate tat makes te present
value of cas inflows from te bond equal to te
cas outflow for purcasing te bond.
e relation between te cas outflow, te cas
inflow and te YM of a bond can be expressed
as
MP = 2t
(1 + YM)t (1 +
YM)n
ñ
B D RUR (2 .)
Were -
MP = 2urrent market price of te
bond
2t = 2as inflow from te bond
trougout te olding period.
= erminal cas inflow received at
te end of te olding
period.
D
B D PRI2I
RM
e relation between bond prices and canges in
te market interest rates ave been stated by Burton .
Malkiel in te form of five general principles. ese are
known as Bond pricing teorems.
Y
B D PRI2I
RM(2 ..)
YY
B D PRI2I
RM (2 ..)
Yu
B D RI
Ý DAUL RI-
Default risk refers to te
possibility tat a company may fail to pay
te interest or principal on te stipulated
dates. Poor financial performance of te
company leads to suc defaults.
Y
B D RI (2 ..)
Were -
2t = Annual cas flow including
interest & repayment
of principal.
=
olding period.
= Discount rate wic is te
market interest rate.
= e time period of eac cas
flow.
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