McGraw-Hill Ryerson© Bonds & SF Bonds & SF McGraw-Hill Ryerson© Chapter 15

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Calculate … the market price of a bond on any date After completing this chapter, you will be able to: … the yield to maturity of a bond on any interest payment date Learning Objectives LO 1. LO 2.

McGraw-Hill Ryerson© Bonds & SF Bonds & SF … fixed Income investments

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Face Value (or denomination) … the principal amount that the issuer is required to pay to the bond holder on the maturity date Coupon … interest rate paid on face value … rate normally fixed for life of bond … paid semiannually Basic Concepts & Definitions of Main Characteristics

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Basic Concepts & Definitions of … are fixed Income investments i.e. they have a fixed interest rate or coupon payable on the principal amount Main Characteristics … the issue date is the date on which the loan was made and on which interest starts to accrue … a bond is basically a loan used to raise funds for the organization or institution, e.g. CSB’s, Municipalities… … borrower is required to make periodic payments of interest only

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Basic Concepts & Definitions of Main Characteristics … on the maturity date of the bond, the full principal amount is repaid along with the final interest payment … issued with maturities ranging from 2 to 30 years

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Do Canada Savings Bonds have exactly the same characteristics as Marketable Bonds? Canada Savings Bonds Marketable Bonds You can cash in a CSB before its scheduled maturity date and receive the full face value plus accrued interest You cannot do this with a M B If you want to cash in before it matures, you must do this through an investment dealer in the “bond market”

McGraw-Hill Ryerson© Bonds & SF Bonds & SF If the market rate falls below the coupon rate, the bond’s price rises above its face value If the market rate rises above the coupon rate, the bond’s price falls below its face value Market Rate Coupon Rate Bond Price Face Value Market Rate Coupon Rate Bond Price Face Value Effects of Interest Rate Changes on Bond Prices

McGraw-Hill Ryerson© Bonds & SF Bonds & SF   2b = coupon rate (compounded semiannually) FV = Face Value of the bond Effects of Interest Rate Changes on Bond Prices Fair Market Value of a Bond Present Value of the Interest Payments Present Value of the Face Value Formula Bond Price = b(FV) 1 – (1 + i) - n i +FV(1 + i) - n Example

McGraw-Hill Ryerson© Bonds & SF Bonds & SF A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, Interest is paid semi-annually. On September 1, 2002, the prevailing interest rate on long-term bonds abruptly rose from 6% to 6.2% compounded semi-annually. What were the bond's prices before and after the interest rate change? The semi-annual interest paid on the bond is b(FV) = ($5,000) = $165 The semi-annual interest paid on the bond is b(FV) = ($5,000) = $165 FV = b = 6.6%/ September 1, 2002 = interest payment date 15.5 years remain until maturity n = 15.5 * 2 = 31 Calculation LO 1.

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Calculate the bond price before the market rate increase $5, is the bond price before the rate increase PV = A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, Interest is paid semi- annually. On September 1, 2002, the prevailing interest rate on long- term bonds abruptly rose from 6% to 6.2% compounded semi- annually. What were the bond's prices before and after the interest rate change?

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Calculate the bond price after the market rate increase. $5, is the bond price after the rate increase PV = Bond price decreased by… $5, – 5, = $ A $5,000 face value bond has a coupon rate of 6.6% and a maturity date of March 1, Interest is paid semi- annually. On September 1, 2002, the prevailing interest rate on long- term bonds abruptly rose from 6% to 6.2% compounded semi- annually. What were the bond's prices before and after the interest rate change?

McGraw-Hill Ryerson© Bonds & SF Bonds & SF The bond’s yield-to-maturity is the discount rate that makes the combined… Calculating the Yield- t o-Maturity of a Bond PV of all remaining interest payments and the Face Value equal to the bond’s Market Value LO 2.

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Calculating the Yield- t o-Maturity of a Bond A $1,000 face value Province of Manitoba bond, bearing interest at 5.8% payable semiannually, has 11 years remaining until maturity. What is the bond’s yield to maturity (YTM) at its current market price of $972? P/Y = 2 I/Y = The bond’s YTM is 6.154% PMT = 1000*5.8%/2

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Pricing a Bond between Interest Payment Dates Pricing a Bond between Interest Payment Dates A $1,000, 20 year, 6% coupon bond was issued on August 15, It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell? Calculate the PV of the remaining payments on the preceding interest payment date. Calculate the FV of the Step 1 result on the date of sale.

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Pricing a Bond between Interest Payment Dates A $1,000, 20 year, 6% coupon bond was issued on August 15, It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell? P/Y = 2 P/V = On August 15, 2002, the bond’s value is $ Most recent interest payment date is August 15, 2002 PMT = 1000*6.0%/2

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Pricing a Bond between Interest Payment Dates P/Y = 2 P/V = Calculate the FV of $ on Nov.3, 2002 We need to find: a) # of days between interest payment dates, and b) # of days from Aug.15 to Nov.3 We need to find: a) # of days between interest payment dates, and b) # of days from Aug.15 to Nov.3 A $1,000, 20 year, 6% coupon bond was issued on August 15, It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Using… Texas Instruments BAII PLUS i Days Between Dates 2nd Enter Date CPT Enter Calculate… the time from Aug. 15 th to Nov. 3 rd DBD = 80 … the time from Aug. 15 th,2002 to Feb. 15 th,2003 DBD = nd Date CPT Enter

McGraw-Hill Ryerson© Bonds & SF Bonds & SF Pricing a Bond between Interest Payment Dates P/Y = The bond sold for $ on Nov.3, 2002 N = 80/184 FV= A $1,000, 20 year, 6% coupon bond was issued on August 15, It was sold on Nov 3, 2002 to yield the purchaser 6.5% compounded semiannually until maturity. At what price did the bond sell?

McGraw-Hill Ryerson© Bonds & SF Bonds & SF This site provides complete details on how bonds function. Just click on the areas that the site provides for information. Click here:

McGraw-Hill Ryerson© Bonds & SF Bonds & SF This completes Chapter 15