© K. Cuthbertson and D. Nitzsche Figures for Chapter 7 BOND MARKETS (Investments : Spot and Derivatives Markets)

© K. Cuthbertson and D. Nitzsche Figure 7.1 : Spot rate : zero coupon bond Time n = time to maturity of bond (years) M = 100 = redemption / maturity value of the bond P = bond price r = spot rate 0n M = 100 P = M/(1+r) n r = (M/P) 1/n - 1

© K. Cuthbertson and D. Nitzsche Figure 7.2 : Coupon paying bond Time 0n P CCCC 100 n = time to maturity of bond 100 = redemption value, or par value, of bond P = bond price C = coupon on bond

© K. Cuthbertson and D. Nitzsche Figure 7.3 : Holding period return over 2 years Time 0n P 0 = $1000 (YTM = 10%) $100C M = $1000 Reinvestment rate = 8% $100 P 2 = $ (YTM = 10%) 8% 5 year, 10% coupon (annual) Par = $1000 P 0 = $1000 (YTM = 10%) Capital gain

© K. Cuthbertson and D. Nitzsche Figure 7.4 : Nominal amount of gilts outstanding

© K. Cuthbertson and D. Nitzsche M Bondholders Payoff Value of firm Figure 7.8 : Shareholder and bondholder payoffs Value of firm M Shareholders Payoff S 0