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# Bwfs3013 Debt Part I

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### Bwfs3013 Debt Part I

1. 1. BWFS 3013
2. 2. 10.1 BOND CHARACTERISTICS
3. 3. <ul><li>Face or par value </li></ul><ul><li>Coupon rate </li></ul><ul><ul><li>Zero coupon bond </li></ul></ul><ul><li>Compounding and payments </li></ul><ul><ul><li>Accrued Interest </li></ul></ul><ul><li>Indenture </li></ul>
4. 4. <ul><li>T Note maturities range up to 10 years </li></ul><ul><li>T bond maturities range from 10 – 30 years </li></ul><ul><li>Bid and ask price </li></ul><ul><ul><li>Quoted in points and as a percent of par </li></ul></ul><ul><li>Accrued interest </li></ul><ul><ul><li>Quoted price does not include interest accrued </li></ul></ul>
5. 5. 10.2 BOND PRICING
6. 6. <ul><li>P B = Price of the bond </li></ul><ul><li>C t = interest or coupon payments </li></ul><ul><li>T = number of periods to maturity </li></ul><ul><li>r = semi-annual discount rate or the semi-annual yield to maturity </li></ul>P C r Par Value r B t T t T T T       ( ) ( ) 1 1 1
7. 7. 77 . 148 , 1 ) 03 . 1 ( 1 1000 ) 03 . 1 ( 1 40 20 20 1        P P B t t B Coupon = 4%*1,000 = 40 (Semiannual) Discount Rate = 3% (Semiannual) Maturity = 10 years or 20 periods Par Value = 1,000
8. 8. 10.3 BOND YIELDS
9. 9. <ul><li>Prices and Yields (required rates of return) have an inverse relationship </li></ul><ul><li>When yields get very high the value of the bond will be very low </li></ul><ul><li>When yields approach zero, the value of the bond approaches the sum of the cash flows </li></ul>
10. 10. <ul><li>YTM is the discount rate that makes the present value of a bond’s payments equal to its price </li></ul><ul><li>8% coupon, 30-year bond selling at \$1,276.76: </li></ul>
11. 12. <ul><li>Current Yield </li></ul><ul><li>Yield to Call </li></ul><ul><ul><li>Call price replaces par </li></ul></ul><ul><ul><li>Call date replaces maturity </li></ul></ul><ul><li>Holding Period Yield </li></ul><ul><ul><li>Considers actual reinvestment of coupons </li></ul></ul><ul><ul><li>Considers any change in price if the bond is held less than its maturity </li></ul></ul>
12. 13. 10.4 BOND PRICES OVER TIME
13. 14. <ul><li>Premium Bond </li></ul><ul><ul><li>Coupon rate exceeds yield to maturity </li></ul></ul><ul><ul><li>Bond price will decline to par over its maturity </li></ul></ul><ul><li>Discount Bond </li></ul><ul><ul><li>Yield to maturity exceeds coupon rate </li></ul></ul><ul><ul><li>Bond price will increase to par over its maturity </li></ul></ul>
14. 17. 10.5 DEFAULT RISK AND BOND PRICING
15. 18. <ul><li>Rating companies </li></ul><ul><ul><li>Moody’s Investor Service </li></ul></ul><ul><ul><li>Standard & Poor’s </li></ul></ul><ul><ul><li>Fitch </li></ul></ul><ul><li>Rating Categories </li></ul><ul><ul><li>Investment grade </li></ul></ul><ul><ul><li>Speculative grade </li></ul></ul>
16. 19. <ul><li>Coverage ratios </li></ul><ul><li>Leverage ratios </li></ul><ul><li>Liquidity ratios </li></ul><ul><li>Profitability ratios </li></ul><ul><li>Cash flow to debt </li></ul>
17. 20. <ul><li>Sinking funds </li></ul><ul><li>Subordination of future debt </li></ul><ul><li>Dividend restrictions </li></ul><ul><li>Collateral </li></ul>
18. 21. 10.6 THE YIELD CURVE
19. 22. <ul><li>Relationship between yields to maturity and maturity </li></ul><ul><li>Yield curve - a graph of the yields on bonds relative to the number of years to maturity </li></ul><ul><ul><li>Usually Treasury Bonds </li></ul></ul><ul><ul><li>Have to be similar risk or other factors would be influencing yields </li></ul></ul>
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