1. V: Debt Markets
12: Prices and Yields

2. Time Value of Money
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3. Time Value of Money
¥100
£100
$100
M 300
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4. Time Value of Money
100
1.61
¥100
$100
£100
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5. Time Value of Money 3% 4% $1002015 $1002017 $1002016
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6. Time Line Interest rates between compounding lines Compounding lines
3% % % % % %
$ $ $ $ $100
Cash flows
Positive and negative
at or between compounding lines
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7. Time Line 3% 4% 5% 4% 5% 3% $100 $200 -$100 $300 $100
3% % % % % %
$ $ $ $ $100
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8. Bonds
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9. Bonds
Documentary Evidence of Debt
Specifies
Principal
Coupon
Maturity

10. Discovery Café Bond Principal: $1,000,000 Coupon: 6% Maturity:
September 26, 2021

11. Start at the Maturity Date Go back six months at a time
Discovery Café Bond
Contract specifies payments over time
9/26/18
9/26/19
9/26/20
9/26/21
3/26/18
3/26/19
3/26/20
3/26/21
$30,000
$30,000
$30,000
$30,000
$30,000
$30,000
$30,000
$30,000 $1,000,000
Go back six months at a time
9/26/17

12. Yield on alternative investments
Yield versus Coupon
$40,000 $1,000,000
$40,000
8% Coupon
Market Yield:
Yield on alternative investments
-$1,000,000 8%)
$30,000 $1,000,000
$30,000
6% Coupon
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13. Yield on alternative investments
Yield versus Coupon
$20,000 $1,000,000
$20,000
4% Coupon
Market Yield:
Yield on alternative investments
-$1,000,000 4%)
$30,000 $1,000,000
$30,000
6% Coupon
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14. Price Yield Curve
Prices expressed as % of face value; 100. not $100.

15. Calculator Techniques
SDT =
CPN = 6 (%)
RDT =
RV = 100 (%)
360 (Days in a Year)
2/Y (2 coupons per year)
YLD = 7 (%)
PRI = [CPT] (%)
AI = (%)
Coupon Rate
(Annual)

16. Yields
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17. due September 26, 2021 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 September 26, 2021

18. Income Yield
Current or Income Yield

19. Promised Yield to Maturity
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20. Promised Yield to Maturity
Capital Gain=0.876%
Yield Income=6.214%
YTM=7%
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21. YTM = 7.00% CPN = 6. 360 2/Y RDT = RV = 9.26 21 SDT = YLD = PRI =
$30,000 $1,000,000
$30,000
6% Coupon
CPN = 6.
360
2/Y
100
Priced to yield 7%
RDT =
RV =
SDT =
YLD =
PRI =
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22. YTM = 5.00% (Buyer) 9.26 21 RDT = SDT = 9.26 18 RV = YLD = CPN = 6.
$30,000 $1,000,000
6% Coupon
$30,000
Priced to yield 5%
100
RDT =
RV =
SDT =
YLD =
CPN = 6.
360
2/Y
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23. Realized Yield = 12.432% (Seller)
$30,000
6% Coupon
YTM=5%
YTM=7%
CPN = 6.
360
2/Y
RDT =
RV =
SDT =
PRI =
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24. Realized Yield %
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25. Effective Annual Rate
Including compounding

26. Bond Equivalent Yield
Twice the semi-annual rate

27. Yields
12 – 8:

28. V: Debt Markets I