1. FIXED INCOME MANAGEMENT1 MEASURING YIELD

2. FIXED INCOME MANAGEMENT2

3. 3

4. 4 CURRENT YIELD YIELD TO MATURITY YIELD TO CALL

5. FIXED INCOME MANAGEMENT5 CURRENT YIELD ANNUAL DOLLAR COUPON INTEREST CURRENT YIELD = ------------------------------------------------------ PRICE TIME VALUE IS IGNORED PURCHASE PRICE IS IGNORED (discount or premium)

6. FIXED INCOME MANAGEMENT6 YIELD TO MATURITY THE YIELD TO MATURITY IS THE RATE OF RETURN A BONDHOLDER WOULD REALIZE IF THE BOND IS HELD TO MATURITY AND ALL CASH FLOWS REINVESTED THE MOST IMPORTANT YIELD

7. FIXED INCOME MANAGEMENT7 THE OBJECTIVE IS TO FIND THE INTEREST RATE (« r ») THAT WILL MAKE THE PRESENT VALUE OF OF THE SUM OF THE CASH FLOWS EQUAL TO THE PRICE YIELD TO MATURITY (YTM) IS ANOTHER SORT OF INTERNAL RATE OF RETURN

8. FIXED INCOME MANAGEMENT8 INTERNAL RATE OF RETURN Suppose a fixed income product, priced at $770 has the following payments: YEARS FROM NOWCASH FLOW TO INVESTOR -------------------------------------------------------------------------------------- 1$200 2$200 3$250 4$400

9. FIXED INCOME MANAGEMENT9 $770.4 = 200/(1+Y) + 200/(1+Y) 2 +250/(1+Y) 3 +400/( 1+Y) 4 Y = 11.99%.

10. FIXED INCOME MANAGEMENT10 YEARS FROM NOW YEARLY CASH FLOW TO INVESTOR 1$100 2 3 4$1100 SUPPOSE THAT A BOND TRADES AT $904.27 AND PROMISES TO MAKE THE FOLLOWING PAYMENTS. What is its YTM ? WHAT IS THE COUPON OF THE BOND ? 10%

11. FIXED INCOME MANAGEMENT11 YEARS FROM NOW CASH FLOW TO INVESTOR 1$100 2 3 4$1100 WHAT IS THE PV OF THE CASH FLOWS (BOND PRICE) TRYING WITH A YTM OF 10%? $90.91 $82.64 $75.13 $751.31 PV OF CASH FLOWS $1000 PRICE IS TO HIGH

12. FIXED INCOME MANAGEMENT12 YEARS FROM NOW CASH FLOW TO INVESTOR 1$100 2 3 4$1100 WHAT IS THE PV OF THE CASH FLOWS TRYING WITH ANNUAL INTEREST RATE AT 12%? $89.29 $79.72 $71.18 $699.06 PV OF CASH FLOWS $939.24 PRICE IS STILL TOO HIGH

13. FIXED INCOME MANAGEMENT13 YEARS FROM NOW CASH FLOW TO INVESTOR 1$100 2 3 4$1100 WHAT IS THE PV OF THE CASH FLOWS TRYING WITH ANNUAL INTEREST RATE AT 13.27%? $88.28 $77.94 $68.81 $668.24 PV OF CASH FLOWS $904.27

14. FIXED INCOME MANAGEMENT14 Bond Selling at Realtionship ----------------------------------------------------------- Par Coupon rate =Current yield=YTM Discount Coupon rate < current yield <YTM Premium Coupon rate > current yield >YTM

15. FIXED INCOME MANAGEMENT15 YIELD TO CALL THE YIELD TO CALL ASSUMES THAT THE ISSUER WILL CALL THE BOND AT SOME ASSUMED CALL DATE AND THE CALL PRICE IS THEN THE CALL PRICE SPECIFIED IN THE CALL SCHEDULE AS AN INVESTOR, WITH RATES FALLING, WOULD YOU RATHER BUY A CALLABLE BOND OR A NON CALLABLE BOND ? NON CALLABLE

16. FIXED INCOME MANAGEMENT16 YIELD TO WORST It is the lowest between the yield to call and the yield to maturity

17. FIXED INCOME MANAGEMENT17 BOND’S TOTAL RETURN: 3 COMPONENTS 1.TOTAL COUPONS INTEREST 2. CAPITAL GAIN 3. INTEREST ON INTEREST

18. FIXED INCOME MANAGEMENT18 TOTAL COUPONS INTEREST NUMBER OF PAYMENTS X COUPON DOLLAR AMOUNT

19. FIXED INCOME MANAGEMENT19 CAPITAL GAIN FACE VALUE - PURCHASE PRICE

20. FIXED INCOME MANAGEMENT20 INTEREST ON INTEREST RETURN WHEN THE SAME AMOUNT OF MONEY IS INVESTED PERIODICALLY, IT IS REFERRED TO AS AN ANNUITY (1 + r) t - 1 C * ------------------------- - tC r

21. FIXED INCOME MANAGEMENT21 REINVESTMENT RISK GE 7% 2018 TRADES AT $769.40. YTM IS ? WHAT IS THE TOTAL COUPON INTEREST$560 WHAT IS THE CAPITAL GAIN ? 1000 – 769.40 = $230.60 WHAT IS THE INTEREST EARNED ON THE INTEREST ? (assume 5% and semi annual reinvestment) $678.31 – 560 = 118.31 10%

22. FIXED INCOME MANAGEMENT22 Interest on interest calculation…. [ 1.05 28 - 1 ] 35------------------ - (28 )(35) = $1064 0.05

23. FIXED INCOME MANAGEMENT23 WHAT IS THE TOTAL DOLLAR RETURN ON THIS BOND ? $560 + $230.60 + $118.31=$908 SUPPOSE YOU INVESTED $769.40 FOR 8 YEARS AT 5% SEMI-ANNUALLY. WHAT IS THE FUTURE VALUE OF THAT AMOUNT ? $769.40 (1 + 0.025) 16 = $ 1142 WHY THIS DIFFERENCE ? REINVESTMENT RISK

24. FIXED INCOME MANAGEMENT24 QUESTIONS 1.IS THE REINVESTMENT RISK HIGHER OR LOWER WITH A LOW COUPON ? LOWER

25. FIXED INCOME MANAGEMENT25 TAKE A BREAK !