6- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Seventh Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Chapter 6 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Valuing Bonds

6- 2 Topics Covered  The Bond Market  Interest Rates and Bond Prices  Current Yield ( 当期收益率 )and Yield to Maturity （到期收益率）  Bond Rates of Return( 持有期收益率 )  The Yield Curve （收益曲线）  Corporate Bonds and the Risk of Default （ 违约风险）

6- 3 Bonds Terminology （术语）  Bond - Security that obligates the issuer to make specified payments to the bondholder.  Coupon （票息） - The interest payments made to the bondholder.  Face Value (Par Value or Principal Value) - Payment at the maturity of the bond.  Coupon Rate - Annual interest payment, as a percentage of face value.

6- 4 Bond Pricing The price of a bond is the Present Value of all cash flows generated by the bond (i.e. coupons and face value) discounted at the required rate of return.

6- 5 Bonds WARNING The coupon rate IS NOT the discount rate ( 投 资要求的最低收益率，一种机会成本 )used in the Present Value calculations. The coupon rate merely tells us what cash flow the bond will produce. Since the coupon rate is listed as a %, this misconception （误解） is quite common.

6- 6 Bond Cash Flows

6- 7 Bond Pricing Example What is the price of a 5.0 % annual coupon bond, with a $1,000 face value, which matures in 3 years? Assume a required return of 2.15%.

6- 8 Bond Pricing Example (continued) Q: How did the calculation change, given semi-annual coupons versus annual coupon payments?

6- 9 Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 2.15% AND the coupons are paid semi- annually?

6- 10 Bond Pricing Example (continued) Q: How did the calculation change, given semi- annual coupons versus annual coupon payments? Time Periods Paying coupons twice a year, instead of once doubles the total number of cash flows to be discounted in the PV formula. Discount Rate Since the time periods are now half years, the discount rate is also changed from the annual rate to the half year rate.

6- 11 Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 5.0 %? （平价发行）

6- 12 Bond Pricing Example (continued) What is the price of the bond if the required rate of return is 8 %? （折价发行）

6- 13 Bond Pricing  The value of the 5% bond falls as interest rates rise

6- 14 Bond Pricing Price path for Premium Bond Price path for Discount Bond Today Maturity

6- 15 Interest Rate Risk 30 yr bond 3 yr bond When the interest rate equals the 5.0% coupon rate, both bonds sell at face value

6- 16 Bond Yields  Current Yield ( 当期收益率 ) - Annual coupon payments divided by bond price.  Yield To Maturity （持有至到期收益率） - Interest rate for which the present value of the bond’s payments equal the price.  Rate of return during the period （持有期间 收益率）

6- 17 Bond Yields Current Yield ( 当期收益率 ) Annual coupon payments divided by bond price( 未考虑价差损益，不是一个完整的 投资收益的概念 ). Example P134

6- 18 Bond Yields Calculating Yield to Maturity (YTM=r) If you are given the price of a bond (PV) and the coupon rate, the yield to maturity can be found by solving for r.

6- 19 Bond Yields Example What is the YTM of a 5.0 % annual coupon bond, with a $1,000 face value, which matures in 3 years? The market price of the bond is $1, YTM = 2.15%

6- 20 Bond Yields Rate of Return - Earnings per period per dollar invested( 一个完整的投资收益的概念 ).

6- 21 Bond Yields Rate of Return during the period Yield to Maturity P136 Self-test 6.6

6- 22 The Yield Curve Yield Curve – relationship between bond yields And maturity. Figure 6-7 : P138

6- 23 The Yield Curve Treasury strips are bonds that make a single payment. The yields on Treasury strips in February 2008 show that investors received a higher yield on longer term bonds.

6- 24 Nominal and Real rates Yield on UK nominal bonds Yield on UK indexed bonds P105 TIPS ：预防通货膨胀政府债券 (indexed bonds)

6- 25 Corporate Bonds  Zero coupons （零息债券）  Floating rate bonds （浮动利率债券）  Convertible bonds （可转换债券）

6- 26 Default Risk  Credit risk( 信用风险 )or default risk( 违约风 险 )  Default premium （违约溢价）  Investment grade( 投资级别 )  Junk bonds （垃圾债券）

6- 27 Default Risk

6- 28 Default Risk Yield spreads between corporate and 10-year Treasury bonds

6- 29 Web Resources