1 Debt Valuation Topic #2. 2 Context Complete Markets Bonds  Time Value of Money  Bond Valuation Equity Derivatives Real Estate.

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Presentation transcript:

1 Debt Valuation Topic #2

2 Context Complete Markets Bonds  Time Value of Money  Bond Valuation Equity Derivatives Real Estate

3 Context Complete Markets Bonds  Time Value of Money  Bond Valuation Equity Derivatives Real Estate

4 Moving cash in time Compare cash only at the same point in time Future Value  Compounding Present Value  Discounting NPV

5 Special Cases Perpetuity Annuity Growing Perpetuity

6 Excel functions PV FV PMT RATE

7 Context Complete Markets Bonds  Time Value of Money  Bond Valuation Equity Derivatives Real Estate

8 Bond Terminology Maturity date Term Face value Coupons and coupon payments Zero-coupon bond Yield to Maturity  Risk-free interest rate  Spot rates Yield curve

9 Bond Valuation Yield to Maturity of a Coupon Bond Price given YTM Time and bond prices Interest rate changes and bond prices  Interest rate sensitivity of bond prices  Duration

10

11 Yield Curve and Bond Arbitrage Zero coupon bonds prices

12 Yield Curve and Bond Arbitrage Zero coupon bonds yields

13 Corporate Bonds Credit risk YTM Risk premium Bond ratings  Credit spread

14 Rating is a very precise business

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