V: Debt Markets 12: Prices and Yields.

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Presentation transcript:

V: Debt Markets 12: Prices and Yields

Time Value of Money © Oltheten & Waspi 2012

Time Value of Money ¥100 £100 $100 M 300 © Oltheten & Waspi 2012

Time Value of Money 100 1.61 ¥100 $100 £100 © Oltheten & Waspi 2012

Time Value of Money 3% 4% $1002015 $1002017 $1002016 © Oltheten & Waspi 2012

Time Line Interest rates between compounding lines Compounding lines 3% 4% 5% 4% 5% 3% $100 $200 -$100 $300 $100 Cash flows Positive and negative at or between compounding lines © Oltheten & Waspi 2012

Time Line 3% 4% 5% 4% 5% 3% $100 $200 -$100 $300 $100 3% 4% 5% 4% 5% 3% $100 $200 -$100 $300 $100 © Oltheten & Waspi 2012

Bonds © Oltheten & Waspi 2012

Bonds Documentary Evidence of Debt Specifies Principal Coupon Maturity

Discovery Café Bond Principal: $1,000,000 Coupon: 6% Maturity: September 26, 2021

Start at the Maturity Date Go back six months at a time Discovery Café Bond Contract specifies payments over time 9/26/18 9/26/19 9/26/20 9/26/21 3/26/18 3/26/19 3/26/20 3/26/21 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $1,000,000 Go back six months at a time 9/26/17

Yield on alternative investments Yield versus Coupon $40,000 $1,000,000 $40,000 8% Coupon Market Yield: Yield on alternative investments -$1,000,000 (PV @ 8%) $30,000 $1,000,000 $30,000 6% Coupon © Oltheten & Waspi 2012

Yield on alternative investments Yield versus Coupon $20,000 $1,000,000 $20,000 4% Coupon Market Yield: Yield on alternative investments -$1,000,000 (PV @ 4%) $30,000 $1,000,000 $30,000 6% Coupon © Oltheten & Waspi 2012

Price Yield Curve Prices expressed as % of face value; 100. not $100.

Calculator Techniques SDT = CPN = 6 (%) RDT = RV = 100 (%) 360 (Days in a Year) 2/Y (2 coupons per year) 9.26 17 YLD = 7 (%) PRI = [CPT] (%) AI = 0.000 (%) 9.26 21 Coupon Rate (Annual)

Yields © Oltheten & Waspi 2012

due September 26, 2021 Nominal Yield Coupon Rate Discovery Café $1,000,000. @ 6% . Discovery Café Inc, incorporated in the State of Illinois (herein called the Company) for value received hereby promises to pay to the registered owner hereof on February 20, 2013 the sum of one million dollars and to pay interest semi-annually on August and February 20 of each year the sum of one half the annual interest thereon calculated at a semi-annual rate of half the stated annual interest of 6%. due September 26, 2021

Income Yield Current or Income Yield

Promised Yield to Maturity © Oltheten & Waspi 2012

Promised Yield to Maturity Capital Gain=0.876% Yield Income=6.214% YTM=7% © Oltheten & Waspi 2012

YTM = 7.00% CPN = 6. 360 2/Y RDT = RV = 9.26 21 SDT = YLD = PRI = $30,000 $1,000,000 $30,000 6% Coupon CPN = 6. 360 2/Y Matures @ 100 Priced to yield 7% RDT = RV = 9.26 21 SDT = YLD = PRI = 9.26 17 © Oltheten & Waspi 2012

YTM = 5.00% (Buyer) 9.26 21 RDT = SDT = 9.26 18 RV = YLD = CPN = 6. $30,000 $1,000,000 6% Coupon $30,000 Priced to yield 5% Matures @ 100 RDT = RV = 9.26 21 SDT = YLD = 9.26 18 CPN = 6. 360 2/Y © Oltheten & Waspi 2012

Realized Yield = 12.432% (Seller) $30,000 6% Coupon Sell @ 102.754063 YTM=5% Buy @ 96.563022 YTM=7% CPN = 6. 360 2/Y RDT = RV = 102.754063 9.26 18 SDT = PRI = 96.563022 9.26 17 © Oltheten & Waspi 2012

Realized Yield 12.4317% © Oltheten & Waspi 2012

Effective Annual Rate Including compounding

Bond Equivalent Yield Twice the semi-annual rate

Yields 12 – 8:

V: Debt Markets I