1. V: Debt Markets 12: Prices and Yields

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

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

4. Chapter 12: Prices and Yields $100£100¥100 1001.61 Time Value of Money © Oltheten & Waspi 2012

5. Chapter 12: Prices and Yields Time Value of Money © Oltheten & Waspi 2012 $100 2016 $100 2017 $100 2015 3% 4%

6. 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

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

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

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

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

11. 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

12. 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 (PV @ 8%) Market Yield: Yield on alternative investments

13. 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 (PV @ 4%) Market Yield: Yield on alternative investments

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

15. 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) 2.17 15 2.17 19

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

17. Chapter 12: Prices and Yields © Oltheten & Waspi 2012 Nominal Yield  Coupon Rate Discovery Café $1,000,000. @ 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

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

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

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

21. Chapter 12: Prices and Yields YTM = 7.00% $30,000 $1,000,000 $30,000 6% Coupon Priced to yield 7% Matures @ 100 SDT = YLD = PRI = RDT = RV = CPN = 6. 360 2/Y © Oltheten & Waspi 2012

22. Chapter 12: Prices and Yields $30,000 $1,000,000 6% Coupon $30,000 YTM = 5.00% (Buyer) Priced to yield 5% Matures @ 100 SDT = YLD = RDT = RV = CPN = 6. 360 2/Y © Oltheten & Waspi 2012

23. Chapter 12: Prices and Yields Realized Yield = 12.432% (Seller) $30,000 6% Coupon Buy @ 96.563022 YTM=7% Sell @ 102.754063 YTM=5% SDT = PRI = 96.563022 RDT = RV = 102.754063 CPN = 6. 360 2/Y © Oltheten & Waspi 2012 2.17 16 2.17 15

24. Chapter 12: Prices and Yields Realized Yield © Oltheten & Waspi 2012 12.4317%

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

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

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

28. V: Debt Markets I