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BONDS
VALUATION
Financial Market in the Financial System
2
Availability of information
Liquidity
Price continuity
Transaction cost
External efficiency or information
efficiency
1. Money market
Short-term securities which have
maturity below than one-year.
2. Capital market
Long-term securities which have
maturity longer than one-year.
INT INT M
VB 1
... N
N
(1 k d ) (1 k d ) (1 k d )
90 90 1,000
$887 1
... 10
(1 k d ) (1 k d ) (1 k d )10
AYTM = I + (MV-Vb)/N
(MV +Vb)/2
= $90 + ($1000 - $887)/10
($1000 + $887)/2
= 11%
Change in price
Capital gains yield (CGY)
Beginning price
Expected Expected
Expected total return YTM
CY CGY
SITI AISHAH BINTI KASSIM (FM2) 27
An example:
Current and capital gains yield
Find the current yield and the capital gains yield
for a 10-year, 9% annual coupon bond that sells
for $887, and has a face value of $1,000.
CGY = YTM – CY
= 10.91% - 10.15%
= 0.76%
INPUTS 2n kd / 2 OK cpn / 2 OK
N I/YR PV PMT FV
OUTPUT
Vb = $42.50(PVIFA5%,24) + $1000(PVIF5%,24)
= $896.51
SITI AISHAH BINTI KASSIM (FM2) 36
Semiannual Bonds
Vb = PV (Coupon Payments) + PV (Par Value)
Vb = CPN PVIFA r/2%, 2N + 1000PVIF r/2%, 2N
2
Vb = CPN (1 + r/2)2N – 1 + 1000
2 (r/2)(1 + r/2)2N (1 + r/2)2N
8 - 1135.90 50 1050
INPUTS
N I/YR PV PMT FV
OUTPUT 3.568
THE END