V: Debt Markets 12: Prices and Yields. Chapter 12: Prices and Yields Time Value of Money © Oltheten & Waspi 2012.

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V: Debt Markets 12: Prices and Yields

Chapter 12: Prices and Yields Time Value of Money © Oltheten & Waspi 2012

Chapter 12: Prices and Yields $100 £100 ¥100 M 300 Time Value of Money © Oltheten & Waspi 2012

Chapter 12: Prices and Yields $100£100¥ Time Value of Money © Oltheten & Waspi 2012

Chapter 12: Prices and Yields Time Value of Money © Oltheten & Waspi 2012 $ $ $ % 4%

Chapter 12: Prices and Yields Time Line © Oltheten & Waspi 2012 $100 $200 -$100 $300 $100 3% 4% 5% 4% 5% 3% Cash flows  Positive and negative  at or between compounding lines Compounding lines Interest rates between compounding lines

Chapter 12: Prices and Yields Time Line © Oltheten & Waspi 2012 $100 $200 -$100 $300 $100 3% 4% 5% 4% 5% 3%

Chapter 12: Prices and Yields Bonds © Oltheten & Waspi 2012

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Bonds  Documentary Evidence of Debt  Specifies  Principal  Coupon  Maturity

Chapter 12: Prices and Yields © Oltheten & Waspi 2012  Principal: $1,000,000  Coupon: 6%  Maturity: Discovery Café Bond February 17, 2019

Chapter 12: Prices and Yields © Oltheten & Waspi 2012  Contract specifies payments over time $30,000 Discovery Café Bond Start at the Maturity Date $30,000 $1,000,000 Go back six months at a time 2/17/15 $30,000 8/17/15 8/17/16 8/17/17 8/17/18 2/17/16 2/17/17 2/17/18 2/17/19

Chapter 12: Prices and Yields Yield versus Coupon © Oltheten & Waspi 2012 $30,000 $1,000,000 $30,000 6% Coupon $40,000 $1,000,000 $40,000 8% Coupon -$1,000,000 8%) Market Yield: Yield on alternative investments

Chapter 12: Prices and Yields Yield versus Coupon © Oltheten & Waspi 2012 $30,000 $1,000,000 $30,000 6% Coupon $20,000 $1,000,000 $20,000 4% Coupon -$1,000,000 4%) Market Yield: Yield on alternative investments

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Price Yield Curve  Prices expressed as % of face value; 100. not $100.

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Calculator Techniques  SDT =  CPN =6 (%)  RDT =  RV =100 (%)  360 (Days in a Year)  2/Y (2 coupons per year)  YLD = 7 (%)  PRI = [CPT] (%)  AI =0.000 (%) Coupon Rate (Annual)

Chapter 12: Prices and Yields Yields © Oltheten & Waspi 2012

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Nominal Yield  Coupon Rate Discovery Café 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 February 17, 2019

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Income Yield  Current or Income Yield

Chapter 12: Prices and Yields Promised Yield to Maturity © Oltheten & Waspi 2012

Chapter 12: Prices and Yields Promised Yield to Maturity © Oltheten & Waspi 2012 YTM=7% Yield Income =6.214% Capital Gain=0.876%

Chapter 12: Prices and Yields YTM = 7.00% $30,000 $1,000,000 $30,000 6% Coupon Priced to yield 7% 100 SDT = YLD = PRI = RDT = RV = CPN = /Y © Oltheten & Waspi 2012

Chapter 12: Prices and Yields $30,000 $1,000,000 6% Coupon $30,000 YTM = 5.00% (Buyer) Priced to yield 5% 100 SDT = YLD = RDT = RV = CPN = /Y © Oltheten & Waspi 2012

Chapter 12: Prices and Yields Realized Yield = % (Seller) $30,000 6% Coupon YTM=7% YTM=5% SDT = PRI = RDT = RV = CPN = /Y © Oltheten & Waspi

Chapter 12: Prices and Yields Realized Yield © Oltheten & Waspi %

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Effective Annual Rate  Including compounding

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Bond Equivalent Yield  Twice the semi-annual rate

Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Yields  12 – 8:

V: Debt Markets I