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Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
Bond Pricing And Analysis
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Bond Pricing And Analysis

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  • 1. BOND ANALYSIS
  • 2. CAPITALIZATION OF INCOME METHOD <ul><li>PROMISED YIELD-TO-MATURITY </li></ul><ul><ul><li>In equation form </li></ul></ul><ul><ul><li>where P=the current market price of bond </li></ul></ul><ul><ul><li>n=the number of years to maturity </li></ul></ul><ul><ul><li>C t =the annual coupon payment </li></ul></ul><ul><ul><li>y=the prevailing yield to maturity </li></ul></ul>
  • 3. CAPITALIZATION OF INCOME METHOD <ul><li>INTRINSIC VALUE </li></ul><ul><ul><li>In equation form </li></ul></ul>
  • 4. CAPITALIZATION OF INCOME METHOD <ul><li>SOLVING FOR V, </li></ul><ul><ul><li>Given the current market price (P), the investment decision is </li></ul></ul><ul><ul><ul><li>if V is the intrinsic value and </li></ul></ul></ul><ul><ul><ul><li>V>P buy the bond </li></ul></ul></ul><ul><ul><ul><li>V<P don’t buy </li></ul></ul></ul>
  • 5. CAPITALIZATION OF INCOME METHOD <ul><li>ALTERNATIVELY </li></ul><ul><ul><li>SOLVING FOR y * </li></ul></ul><ul><ul><li> y * >y bond overprice </li></ul></ul><ul><ul><li> y * <y bond underpriced </li></ul></ul>
  • 6. BOND ATTRIBUTES <ul><li>SIX ATTRIBUTES that affect a bond’s value </li></ul><ul><ul><li>LENGTH OF TIME TO MATURITY </li></ul></ul><ul><ul><li>COUPON RATE </li></ul></ul><ul><ul><li>CALL PROVISIONS </li></ul></ul><ul><ul><li>TAX STATUS </li></ul></ul><ul><ul><li>MARKETABILITY </li></ul></ul><ul><ul><li>LIKELIHOOD OF DEFAULT </li></ul></ul>
  • 7. LENGTH OF TIME TO MATURITY <ul><li>COUPON RATE AND LENGTH TO MATURITY </li></ul><ul><ul><li>these attributes determine size and timing of cash flow </li></ul></ul><ul><ul><li>yield-to-maturity </li></ul></ul>
  • 8. TAX STRUCTURE <ul><li>TAX STRUCTURE </li></ul><ul><ul><li>Taxation affects bond prices and yields </li></ul></ul><ul><ul><ul><li>low-coupon bonds selling at a discount provide return in </li></ul></ul></ul><ul><ul><ul><ul><li>coupon payments </li></ul></ul></ul></ul><ul><ul><ul><ul><li>gains from price appreciations </li></ul></ul></ul></ul><ul><ul><ul><li>taxes on appreciations may be deferred until bond sale or maturity </li></ul></ul></ul><ul><ul><ul><li>discount bonds have a tax advantage </li></ul></ul></ul>
  • 9. TAX STRUCTURE <ul><li>TAX STRUCTURE </li></ul><ul><ul><li>Taxation affects bond prices and yields </li></ul></ul><ul><ul><ul><li>because of tax effect, discount bonds should have a slightly lower before-tax yield </li></ul></ul></ul><ul><ul><ul><li>low-coupon bonds will have a slightly higher intrinsic value </li></ul></ul></ul>
  • 10. MARKETABILITY <ul><li>MARKETABILITY </li></ul><ul><ul><li>refers to the ability of the investor to resell </li></ul></ul>
  • 11. MARKETABILITY <ul><li>MARKETABILITY </li></ul><ul><ul><li>bid-ask spread is one indicator of marketability </li></ul></ul><ul><ul><ul><li>the higher the spread, the less marketable </li></ul></ul></ul><ul><ul><ul><li>the lower the spread, the more marketable </li></ul></ul></ul><ul><ul><li>bonds that are actively traded should have a lower YTM and a higher V </li></ul></ul>
  • 12. MARKETABILITY <ul><li>MARKETABILITY </li></ul><ul><ul><li>bonds that are actively traded should have a lower YTM and a higher V </li></ul></ul>
  • 13. LIKELIHOOD OF DEFAULT <ul><li>LIKELILHOOD OF DEFAULT </li></ul><ul><ul><li>Bond ratings provided by professional services. </li></ul></ul>
  • 14. LIKELIHOOD OF DEFAULT <ul><li>LIKELILHOOD OF DEFAULT </li></ul><ul><ul><li>Two most famous include </li></ul></ul><ul><ul><ul><li>Moody’s Investors Services, Inc. </li></ul></ul></ul><ul><ul><ul><li>Standard & Poor’s Corporate ratings </li></ul></ul></ul>
  • 15. LIKELIHOOD OF DEFAULT <ul><li>LIKELIHOOD OF DEFAULT </li></ul><ul><ul><li>Categories </li></ul></ul><ul><ul><ul><li>investment grade usually the bonds in the top four ratings </li></ul></ul></ul><ul><ul><ul><li>speculative </li></ul></ul></ul><ul><ul><ul><li>often called junk bonds </li></ul></ul></ul>
  • 16. LIKELIHOOD OF DEFAULT <ul><li>LIKELIHOOD OF DEFAULT </li></ul><ul><ul><li>Bond ratings provided by professional services. </li></ul></ul><ul><ul><ul><li>better ratings are generally associated with </li></ul></ul></ul><ul><ul><ul><ul><li>larger financial leverage </li></ul></ul></ul></ul><ul><ul><ul><ul><li>larger firm size </li></ul></ul></ul></ul><ul><ul><ul><ul><li>larger and steadier profits </li></ul></ul></ul></ul><ul><ul><ul><ul><li>large cash flows </li></ul></ul></ul></ul><ul><ul><ul><ul><li>lack of subordination to other debt series </li></ul></ul></ul></ul>

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