This document describes a financial modeling template for bond valuation. It contains templates to calculate bond yield to maturity and bond price. The yield to maturity template calculates the internal rate of return for holding a bond until maturity based on inputs like coupon rate, bond price, maturity date, and coupon payment frequency. The bond price template calculates the price of a bond based on current market yields and allows sensitivity analysis by changing the yield. The document provides guidance on customizing the templates and important fields within them.
Wayne lippman present s bonds and their valuationWayne Lippman
Bonds are simply long-term IOUs that represent claims against a firm’s assets.
Bonds are a form of debt
Bonds are often referred to as fixed-income investments.
Key Features of a Bond
Debt instrument issued by a corp. or government.
Par value = face amount of the bond, which is paid at maturity (assume $1,000).
Coupon rate – stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest.
Efficient Market Hypothesis Valuation of BondsRafik Algeria
The document discusses the efficient market hypothesis (EMH) and bond valuation. It begins by defining the EMH, which states that security prices reflect all available information. It then describes the three forms of EMH - weak, semi-strong, and strong - which differ in the type of information incorporated into prices. The weak form only includes past price data, semi-strong includes all public information, and strong includes all public and private information. It provides examples of how the different forms are supported or rejected by research. The document concludes by reviewing concepts related to bond valuation such as time value of money, yield, and the price-yield relationship.
The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
The document discusses the fundamentals of bond valuation and analysis. It defines key terms like nominal yield, current yield, promised yield to maturity, and realized (horizon) yield. It also covers how to compute these yields using present value models and formulas. The document also discusses how interest rates are determined based on supply and demand factors like inflation expectations, risk premiums, and economic conditions. Bond yields are influenced not just by broader interest rate determinants but also issue-specific characteristics that impact risk.
The document discusses various topics related to bond valuation including:
1) Types of bonds and bond risks.
2) Methods of calculating bond yields like current yield, coupon yield, and yield to maturity.
3) Bond valuation techniques like calculating present value of future cash flows.
4) Factors that impact bond prices like coupon rate, maturity, and yield.
The document discusses various methods for valuing bonds and shares. It defines key terms related to bonds such as par value, coupon rate, maturity period, current yield, and call option. It also describes types of bonds and risks associated with bonds like interest rate risk and reinvestment risk. Methods covered for valuing bonds include yield to maturity, yield to call, and duration. For shares, it discusses models for valuing preferred and equity shares, including the dividend discount model and various growth models. It provides an example of using a two-stage growth model to calculate the price of a share today given growth rates and discount rate.
The presentation highlights some shortcut formulas that can speed up PV computations if a project have a particular set of cash flow patterns and the opportunity cost of capital is constant
Wayne lippman present s bonds and their valuationWayne Lippman
Bonds are simply long-term IOUs that represent claims against a firm’s assets.
Bonds are a form of debt
Bonds are often referred to as fixed-income investments.
Key Features of a Bond
Debt instrument issued by a corp. or government.
Par value = face amount of the bond, which is paid at maturity (assume $1,000).
Coupon rate – stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest.
Efficient Market Hypothesis Valuation of BondsRafik Algeria
The document discusses the efficient market hypothesis (EMH) and bond valuation. It begins by defining the EMH, which states that security prices reflect all available information. It then describes the three forms of EMH - weak, semi-strong, and strong - which differ in the type of information incorporated into prices. The weak form only includes past price data, semi-strong includes all public information, and strong includes all public and private information. It provides examples of how the different forms are supported or rejected by research. The document concludes by reviewing concepts related to bond valuation such as time value of money, yield, and the price-yield relationship.
The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
The document discusses the fundamentals of bond valuation and analysis. It defines key terms like nominal yield, current yield, promised yield to maturity, and realized (horizon) yield. It also covers how to compute these yields using present value models and formulas. The document also discusses how interest rates are determined based on supply and demand factors like inflation expectations, risk premiums, and economic conditions. Bond yields are influenced not just by broader interest rate determinants but also issue-specific characteristics that impact risk.
The document discusses various topics related to bond valuation including:
1) Types of bonds and bond risks.
2) Methods of calculating bond yields like current yield, coupon yield, and yield to maturity.
3) Bond valuation techniques like calculating present value of future cash flows.
4) Factors that impact bond prices like coupon rate, maturity, and yield.
The document discusses various methods for valuing bonds and shares. It defines key terms related to bonds such as par value, coupon rate, maturity period, current yield, and call option. It also describes types of bonds and risks associated with bonds like interest rate risk and reinvestment risk. Methods covered for valuing bonds include yield to maturity, yield to call, and duration. For shares, it discusses models for valuing preferred and equity shares, including the dividend discount model and various growth models. It provides an example of using a two-stage growth model to calculate the price of a share today given growth rates and discount rate.
The presentation highlights some shortcut formulas that can speed up PV computations if a project have a particular set of cash flow patterns and the opportunity cost of capital is constant
This chapter discusses the valuation of bonds and shares. It explains the characteristics of ordinary shares, preference shares, and bonds. It shows how present value concepts are used to value these securities. The chapter focuses on the price-earnings ratio and its proper and improper uses in valuation. It also covers the determinants of bond values such as maturity, yield to maturity, current yield, and sensitivity to interest rate changes.
A bond is a contract where the borrower pays interest to the lender. Bonds have risks like interest rate risk, default risk, marketability risk, and callability risk. The time value of money concept states that money received today is worth more than money received in the future. Key metrics for bonds include holding period return, current yield, yield to maturity, and duration. Duration measures a bond's interest rate sensitivity - the higher the duration, the more sensitive the bond is to interest rate changes.
The document explains the inverse relationship between bond prices and yields. It states that when bond prices go down, bond yields go up, and vice versa. This is illustrated with an example where one investor, Ravi, needs to sell his bond for an emergency. The buyer, John, purchases the bond at a lower price than Ravi paid. However, John earns a higher yield since he paid less for the bond that pays the same return. The example shows that when bond prices fall, the yields rise for new buyers, demonstrating the inverse relationship between the two.
1) The document discusses bonds and bond pricing, including the basic concepts of bonds, how bonds are evaluated and priced, and how to construct bond amortization schedules.
2) Key formulas are presented for pricing a bond using the basic price formula and constructing bond premium or discount amortization schedules using the effective interest method.
3) Examples are provided to illustrate bond pricing, including pricing between coupon dates, and constructing bond premium and discount amortization schedules.
This document provides an overview of key concepts related to valuation of securities, including time value of money, simple vs compound interest, future and present value calculations for single amounts, annuities, and growing annuities. It also discusses bond valuation terminology, risks associated with bonds such as interest rate risk and default risk, and accrued interest calculations. The document uses examples throughout to illustrate various time value of money and bond valuation concepts.
The valuation of bonds ppt @ bec doms financeBabasab Patil
The document discusses the valuation and characteristics of bonds. It covers the basis of bond valuation using present value of expected cash flows. It also discusses bond terminology like maturity, coupon rate, and yield. Bond valuation considers factors like interest rates, time to maturity, coupon payments, and principal repayment. The price of a bond moves in the opposite direction of interest rates.
Bond Valuation, Bond Types, Bond Characteristics, Reasons for issuing Bonds, Bond Risks, Bond Measuring Yield, Bond Pricing Theorems, Factors that Influence Bond Prices, Primary Bond Market, Secondary Bond Market, Bonds in Nepal.
Bonds and shares can be valued using various approaches such as book value, replacement value, liquidation value, and market value. Bond values are determined by factors like face value, interest rate, maturity, redemption value, and market yield. The yield to maturity considers interest payments and capital gains/losses, while current yield only considers annual interest. Duration measures a bond's price sensitivity to interest rate changes. The term structure of interest rates, as shown by the yield curve, can be normal upward sloping or inverted. The expectation, liquidity premium, and segmented markets theories seek to explain the typical upward sloping yield curve. Credit ratings factor in default risk.
This document discusses the valuation of bonds and shares. It defines intrinsic value as the present value of expected future cash flows from an asset, discounted by the required rate of return. Book value is the value of an asset on the balance sheet, calculated as cost minus accumulated depreciation. The document outlines different types of bonds such as irredeemable and redeemable bonds, and how to calculate the present value of bonds with annual and semi-annual interest payments using discounted cash flow formulas. An example calculation is provided.
Chapter 06 Valuation & Characteristics Of BondsAlamgir Alwani
The document discusses various topics related to bond valuation and characteristics, including:
- Bonds are valued based on the present value of their expected future cash flows.
- Bond prices fluctuate as interest rates change, with bond prices falling when rates rise.
- Other factors like call provisions, convertibility, credit ratings, and bond indentures also impact bond valuation and risk.
- Diluted earnings per share calculations must account for potential share dilution from convertible bonds.
The document discusses bonds and their valuation. It begins by outlining key bond characteristics like par value, coupon payments, maturity date, and call provisions. It then explains how to value a bond by discounting its expected cash flows. Specifically, a bond's value is the present value of the coupon payments plus the par value at maturity, discounted at the appropriate interest rate. The value of a bond depends on factors like the coupon rate relative to market interest rates.
The document discusses various methods for valuing different types of securities, including bonds, common stocks, and preferred stocks. It introduces the concepts of book value, market value, and intrinsic value. For bonds, it explains how to calculate value based on periodic interest payments and principal repayment. For common stocks, it presents the dividend discount model based on expected infinite growth of dividends. For preferred stocks, it notes they are valued similarly but with constant dividends. Several examples are provided to illustrate the valuation of each type of security.
This document provides an overview of bond evaluation. It defines key bond terms like coupon rate, face value, maturity date, and yield to maturity. It explains how to calculate current yield, spot interest rate, and bond price. Bond risks discussed are default risk and interest rate risk. The document contains examples of how to value a bond and calculate its yield.
The document provides information about bonds, including:
- Bonds are fixed income instruments that make defined coupon payments and are redeemed at par value at maturity.
- Bond prices are inversely related to interest rates and are influenced by risks like default, interest rate, and marketability.
- The yield to maturity (YTM) is the discount rate that makes the present value of future cash flows equal the market price.
- Duration measures the sensitivity of bond prices to interest rate changes, with longer duration bonds having higher sensitivity.
- Bond management strategies include passive buy-and-hold, indexing, and active strategies that try to time interest rate movements.
The document discusses various topics related to bond valuation including:
1) It defines key bond terminology such as par value, coupon rate, yield to maturity, and duration.
2) It explains how bond prices are affected by changes in market interest rates and how the yield to maturity is calculated.
3) It describes the different types of risks that bondholders face, such as interest rate risk, reinvestment risk, and default risk.
This document provides an overview of bond valuation. It defines a bond as a long-term debt instrument that pays periodic interest to the bondholder. It describes the par or face value of a bond as well as the coupon rate. It discusses the types of risks associated with bonds, such as interest rate risk and default risk. It also covers methods for measuring bond yields, including current yield and yield to maturity. The document uses examples to demonstrate how to calculate bond prices and bond yields.
This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, including coupon rate, current yield, spot interest rate, and yield to maturity. It also covers bond price valuation, bond risks, bond duration, and five principles of bond pricing theorems.
Bond values can be discussed in terms of dollar price or yield to maturity, which are equivalent. Bond yields include the coupon rate, current yield, yield to maturity, modified yield to maturity, yield to call, and realized yield. Duration is a measure of bond price volatility that accounts for time to maturity and coupon payments. It indicates the sensitivity of price to changes in yield. Modified duration adjusts for the holding period yield. Convexity measures the curvature of the price-yield relationship.
This presentation introduces different types of bonds. It begins by defining a bond as a long-term debt instrument used by governments and corporations to raise money for projects. It then describes four main types of bonds: perpetual bonds that never mature; coupon bonds that pay interest and have a maturity date; zero-coupon bonds that do not pay interest but are sold at a discount; and semiannual coupon bonds where adjustments must be made to account for interest being paid twice a year. Formulas for calculating the value of each bond type are provided.
This document discusses bond valuation and characteristics. It covers the basics of bonds including how companies and governments issue bonds to borrow money long-term from the public. It describes some key characteristics of bonds such as how they pay periodic interest to holders but the principal is paid back at maturity. The document also mentions bond ratings, types of bonds, and factors that influence bond prices such as interest rates and inflation.
This chapter discusses the valuation of bonds and shares. It explains the characteristics of ordinary shares, preference shares, and bonds. It shows how present value concepts are used to value these securities. The chapter focuses on the price-earnings ratio and its proper and improper uses in valuation. It also covers the determinants of bond values such as maturity, yield to maturity, current yield, and sensitivity to interest rate changes.
A bond is a contract where the borrower pays interest to the lender. Bonds have risks like interest rate risk, default risk, marketability risk, and callability risk. The time value of money concept states that money received today is worth more than money received in the future. Key metrics for bonds include holding period return, current yield, yield to maturity, and duration. Duration measures a bond's interest rate sensitivity - the higher the duration, the more sensitive the bond is to interest rate changes.
The document explains the inverse relationship between bond prices and yields. It states that when bond prices go down, bond yields go up, and vice versa. This is illustrated with an example where one investor, Ravi, needs to sell his bond for an emergency. The buyer, John, purchases the bond at a lower price than Ravi paid. However, John earns a higher yield since he paid less for the bond that pays the same return. The example shows that when bond prices fall, the yields rise for new buyers, demonstrating the inverse relationship between the two.
1) The document discusses bonds and bond pricing, including the basic concepts of bonds, how bonds are evaluated and priced, and how to construct bond amortization schedules.
2) Key formulas are presented for pricing a bond using the basic price formula and constructing bond premium or discount amortization schedules using the effective interest method.
3) Examples are provided to illustrate bond pricing, including pricing between coupon dates, and constructing bond premium and discount amortization schedules.
This document provides an overview of key concepts related to valuation of securities, including time value of money, simple vs compound interest, future and present value calculations for single amounts, annuities, and growing annuities. It also discusses bond valuation terminology, risks associated with bonds such as interest rate risk and default risk, and accrued interest calculations. The document uses examples throughout to illustrate various time value of money and bond valuation concepts.
The valuation of bonds ppt @ bec doms financeBabasab Patil
The document discusses the valuation and characteristics of bonds. It covers the basis of bond valuation using present value of expected cash flows. It also discusses bond terminology like maturity, coupon rate, and yield. Bond valuation considers factors like interest rates, time to maturity, coupon payments, and principal repayment. The price of a bond moves in the opposite direction of interest rates.
Bond Valuation, Bond Types, Bond Characteristics, Reasons for issuing Bonds, Bond Risks, Bond Measuring Yield, Bond Pricing Theorems, Factors that Influence Bond Prices, Primary Bond Market, Secondary Bond Market, Bonds in Nepal.
Bonds and shares can be valued using various approaches such as book value, replacement value, liquidation value, and market value. Bond values are determined by factors like face value, interest rate, maturity, redemption value, and market yield. The yield to maturity considers interest payments and capital gains/losses, while current yield only considers annual interest. Duration measures a bond's price sensitivity to interest rate changes. The term structure of interest rates, as shown by the yield curve, can be normal upward sloping or inverted. The expectation, liquidity premium, and segmented markets theories seek to explain the typical upward sloping yield curve. Credit ratings factor in default risk.
This document discusses the valuation of bonds and shares. It defines intrinsic value as the present value of expected future cash flows from an asset, discounted by the required rate of return. Book value is the value of an asset on the balance sheet, calculated as cost minus accumulated depreciation. The document outlines different types of bonds such as irredeemable and redeemable bonds, and how to calculate the present value of bonds with annual and semi-annual interest payments using discounted cash flow formulas. An example calculation is provided.
Chapter 06 Valuation & Characteristics Of BondsAlamgir Alwani
The document discusses various topics related to bond valuation and characteristics, including:
- Bonds are valued based on the present value of their expected future cash flows.
- Bond prices fluctuate as interest rates change, with bond prices falling when rates rise.
- Other factors like call provisions, convertibility, credit ratings, and bond indentures also impact bond valuation and risk.
- Diluted earnings per share calculations must account for potential share dilution from convertible bonds.
The document discusses bonds and their valuation. It begins by outlining key bond characteristics like par value, coupon payments, maturity date, and call provisions. It then explains how to value a bond by discounting its expected cash flows. Specifically, a bond's value is the present value of the coupon payments plus the par value at maturity, discounted at the appropriate interest rate. The value of a bond depends on factors like the coupon rate relative to market interest rates.
The document discusses various methods for valuing different types of securities, including bonds, common stocks, and preferred stocks. It introduces the concepts of book value, market value, and intrinsic value. For bonds, it explains how to calculate value based on periodic interest payments and principal repayment. For common stocks, it presents the dividend discount model based on expected infinite growth of dividends. For preferred stocks, it notes they are valued similarly but with constant dividends. Several examples are provided to illustrate the valuation of each type of security.
This document provides an overview of bond evaluation. It defines key bond terms like coupon rate, face value, maturity date, and yield to maturity. It explains how to calculate current yield, spot interest rate, and bond price. Bond risks discussed are default risk and interest rate risk. The document contains examples of how to value a bond and calculate its yield.
The document provides information about bonds, including:
- Bonds are fixed income instruments that make defined coupon payments and are redeemed at par value at maturity.
- Bond prices are inversely related to interest rates and are influenced by risks like default, interest rate, and marketability.
- The yield to maturity (YTM) is the discount rate that makes the present value of future cash flows equal the market price.
- Duration measures the sensitivity of bond prices to interest rate changes, with longer duration bonds having higher sensitivity.
- Bond management strategies include passive buy-and-hold, indexing, and active strategies that try to time interest rate movements.
The document discusses various topics related to bond valuation including:
1) It defines key bond terminology such as par value, coupon rate, yield to maturity, and duration.
2) It explains how bond prices are affected by changes in market interest rates and how the yield to maturity is calculated.
3) It describes the different types of risks that bondholders face, such as interest rate risk, reinvestment risk, and default risk.
This document provides an overview of bond valuation. It defines a bond as a long-term debt instrument that pays periodic interest to the bondholder. It describes the par or face value of a bond as well as the coupon rate. It discusses the types of risks associated with bonds, such as interest rate risk and default risk. It also covers methods for measuring bond yields, including current yield and yield to maturity. The document uses examples to demonstrate how to calculate bond prices and bond yields.
This presentation discusses bond valuation. It defines bonds and bond valuation, which includes calculating the present value of future interest payments and the bond's value at maturity. It then discusses various ways to calculate bond returns, including coupon rate, current yield, spot interest rate, and yield to maturity. It also covers bond price valuation, bond risks, bond duration, and five principles of bond pricing theorems.
Bond values can be discussed in terms of dollar price or yield to maturity, which are equivalent. Bond yields include the coupon rate, current yield, yield to maturity, modified yield to maturity, yield to call, and realized yield. Duration is a measure of bond price volatility that accounts for time to maturity and coupon payments. It indicates the sensitivity of price to changes in yield. Modified duration adjusts for the holding period yield. Convexity measures the curvature of the price-yield relationship.
This presentation introduces different types of bonds. It begins by defining a bond as a long-term debt instrument used by governments and corporations to raise money for projects. It then describes four main types of bonds: perpetual bonds that never mature; coupon bonds that pay interest and have a maturity date; zero-coupon bonds that do not pay interest but are sold at a discount; and semiannual coupon bonds where adjustments must be made to account for interest being paid twice a year. Formulas for calculating the value of each bond type are provided.
This document discusses bond valuation and characteristics. It covers the basics of bonds including how companies and governments issue bonds to borrow money long-term from the public. It describes some key characteristics of bonds such as how they pay periodic interest to holders but the principal is paid back at maturity. The document also mentions bond ratings, types of bonds, and factors that influence bond prices such as interest rates and inflation.
The document discusses bonds, including their characteristics, types, valuation, and the relationship between bond prices and interest rates. It defines bonds, bond valuation using yield to maturity, and how bond prices move inversely with changes in market interest rates, with prices falling when rates rise and rising when rates fall.
Bonds are fixed income securities that promise regular interest payments and repayment of principal at maturity. There are various types including treasury bonds, corporate bonds, and treasury bills. Key bond characteristics include par value, coupon payments, coupon rate, maturity date, and whether it is a floating or zero coupon bond. The bond indenture contract specifies payment terms, collateral, covenants, and other details. Bond valuation considers factors like coupon payments, yield, number of periods, and maturity value. Bond prices are affected by yield to maturity, time to maturity, and coupon size.
- Bond valuation involves discounting future cash flows from bonds like coupon payments and principal repayment to calculate the present value, which is the bond price.
- Zero-coupon bonds pay the full face value at maturity with no interim coupon payments, while coupon bonds pay regular interest payments and repay the principal.
- Bond prices are inversely related to interest rates - they fall when rates rise and vice versa. Longer-term bonds are more sensitive to interest rate changes.
This document provides an overview of bond valuation and the bond market. It discusses key bond features and valuation concepts, including how bond prices are determined by expected future cash flows and interest rates. Government bonds such as Treasury securities are described as well as corporate bonds, which have greater default risk. Bond ratings are also covered, with higher rated bonds seen as less risky. The effects of inflation and the term structure of interest rates on bond yields are summarized.
1. The document discusses methods for valuing different types of financial instruments including bonds, preference shares, and equity shares.
2. Various bond valuation methods are described including valuation based on maturity date, yield to maturity, current yield, and yield to call.
3. Preference shares are valued using the dividend discount model based on expected preference dividends and the cost of preference shares.
4. Equity shares are more difficult to value since dividends can fluctuate, and the document discusses dividend discount models and P/E ratios to estimate equity values.
Bond valuation involves calculating the present value of a bond's future interest payments and principal repayment. There are several types of bonds that differ in issuer and features. Bonds are issued by corporations and governments to raise funds for projects while managing costs and diversifying sources of capital. Investors face various risks when purchasing bonds like interest rate, default, market and call risks. Key metrics for bonds include current yield, yield to maturity, yield to call and realized yield, which are calculated using principles of time value of money. Bond prices generally move inversely to interest rates and bonds with longer maturities are more sensitive to interest rate changes. Price impacts from interest rate changes are also not symmetrical. Lower coupon bonds experience greater price volatility from
The Valuation and Characteristics of BondsVaniChintia1
The document discusses bond valuation and characteristics. It defines key valuation terms like book value, liquidation value, and market value. It then outlines a three-step process to value a bond issued by Toyota: 1) Determine the bond's future cash flows from its coupon payments and maturity value. 2) Determine the required rate of return based on the bond's risk. 3) Discount the future cash flows to the present using the required rate of return to calculate the bond's current market value. It also discusses how yield to maturity measures the expected rate of return and how it relates to current yield.
The document discusses bond valuation and interest rates. It defines key bond concepts like yield to maturity and explains how spot and forward rates are used to value pure discount bonds. The document also explores yield curves and theories for why they take different shapes. Additional topics covered include credit risk, bond ratings, junk bonds, and embedded options in bonds like calls, conversions, and their impact on convertible bond valuation.
This document is a report on credit ratings submitted as a partial fulfillment for a program at IBS Mumbai. It contains an executive summary and sections on the introduction to credit ratings, history of credit ratings, definition of credit ratings, determinants of credit ratings, utility of ratings, limitations of credit ratings, bank loan ratings, introduction to SMERA, SMERA's accomplishments, products offered by SMERA, the rating process, applicable regulatory bodies, types of instruments rated, ethics for rating agencies, and the future of credit rating agencies. The report focuses on explaining credit ratings and analyzing SMERA, a credit rating agency.
The document provides an overview of the X 430.611 credit course, which covers commercial, personal, and global credit from macroeconomic and firm-level perspectives. The course examines various credit instruments and markets, credit decisions, bubbles and crises, and more. It presents sample class content on topics like the importance of credit, capital structure, loan types, money markets, bonds, credit ratings, and credit derivatives.
Compared to equities, bonds at first glance can appear like a throwback to your grandparent's days, but this month we take a look at how bonds may help mitigate risk, and the role they play in a well-diversified portfolio.
This document discusses various concepts related to bond valuation including:
- Bonds provide periodic interest payments and repayment of face value at maturity as cash flows for valuation.
- Key bond features that impact valuation are coupon rate, maturity date, par/face value, current yield.
- Bond prices are sensitive to changes in market interest rates, with prices falling when rates rise.
- Bond valuation involves discounting the coupon payments and face value repayment to their present value using the required rate of return.
The document provides examples of calculating bond prices and yields using time value of money concepts. It also briefly discusses common stock valuation based on dividend payments and expected future sale price.
This document provides information about fixed rate bonds, including:
- Fixed rate bonds pay a predetermined coupon rate and return the principal at maturity. The coupon payments are known but the bond price fluctuates with interest rates.
- Valuation of fixed rate bonds can be done using either a yield-to-maturity approach or a credit spread approach. The yield-to-maturity discounts future cash flows to calculate present value, while the credit spread approach uses a discount rate that includes the benchmark interest rate plus a credit spread.
- Practically, bonds are quoted based on their clean price rather than dirty price which includes accrued interest. The credit spread model allows calculating both fair value and risk measures like interest rate sensit
The document provides information on risk management modules C and D taught by M. Ravindran at the Indian Institute of Banking & Finance. Module C covers treasury management, including treasury products, risk management, and derivative products. Module D covers capital management, prudential norms, asset classification, provisioning, profitability, and profit planning. The document then provides detailed sections on topics from both modules, including money market instruments, yield curves, CRR/SLR, VaR, exchange rate quotation, and spot and forward transactions.
ch21 - Econ 442 - financial markets Par 1 of 2 (1).pdfjgordon21
The chapter discusses bond pricing and interest rate theory. It covers different types of bonds like government, corporate, municipal, and mortgage bonds. It also defines various interest rates used in bond valuation like spot rates, yield to maturity, current yield, and forward rates. Spot rates refer to the yield on zero-coupon bonds for different time periods. Forward rates represent the expected future interest rates for new loans committed today. The timing and definitions of cash flows and interest rates are important for accurately pricing and comparing bonds.
The document provides an overview of bond valuation. It defines what a bond is and key bond characteristics like face value, coupon rate, maturity date. It describes different types of bonds including corporate bonds, government bonds, and municipal bonds. It then explains what bond valuation is, the factors that affect bond prices, and different approaches to calculating bond value such as using the present value of expected cash flows discounted at the yield to maturity. Worked examples are provided to demonstrate how to value both coupon-paying bonds and zero-coupon bonds.
1Valuation ConceptsThe valuation of a financial asset is b.docxeugeniadean34240
1
Valuation Concepts
The valuation of a financial asset is based on determining the present value of future cash flows. Thus we need to know the value of future cash flows and the discount rate to be applied to the future cash flows to determine the current value.
The market-determined required rate of return, which is the discount rate, depends on the market’s perceived level of risk associated with the individual security. Also important is the idea that required rates of return are competitively determined among the many companies seeking financial capital. For example ExxonMobil, due to its low financial risk, relatively high return, and strong market position, is likely to raise debt capital at a significantly lower cost than can United Airlines, a financially troubled firm. This implies that investors are willing to accept low return for low risk, and vice versa. The market allocates capital to companies based on risk, efficiency, and expected returns—which are based to a large degree on past performance. The reward to the financial manager for efficient use of capital in the past is a lower required return for investors than that of competing companies that did not manage their financial resources as well.
Throughout this course, we apply concepts of valuation to corporate bonds, preferred stock, and common stock. For that purpose we have to be aware of the basic characteristics of each form of security as part of the valuation process. We have to consider the following:
· The valuation of a financial asset is based on the present value of future cash flows.
· The required rate of return in valuing an asset is based on the risk involved.
· Bond valuation is based on the process of determining the present value of interest payments plus the present value of the principal payment at maturity.
· Preferred stock valuation is based on the dividend paid.
· Stock valuation is based on determining the present value of the future benefits of equity ownership.
List of terms:
required rate of return
That rate of return that investors demand from an investment to compensate them for the amount of risk involved.
yield to maturity
The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
real rate of return
The rate of return that an investor demands for giving up the current use of his or her funds on a noninflation-adjusted basis. It is payment for forgoing current consumption. Historically, the real rate of return demanded by investors has been of the magnitude of 2 to 3 percent.
inflation premium
A premium to compensate the investor for the eroding effect of inflation on the value of the dollar.
risk-free rate of return
Rate of return on an asset that carries no risk. U.S. Treasury bills are often used to represent this measure, although longer-term government securities have al.
This document provides an overview of syndicated loans. A syndicated loan is one provided by a group of lenders and arranged by one or more commercial or investment banks. Syndicated loans are more efficient than traditional bilateral loans. Arrangers earn fees for raising capital and structuring loans, with higher fees for more complex deals. Loans are launched at a target spread based on investor feedback and can be adjusted using "market flex" language. There are three types of syndications: underwritten deals where arrangers guarantee commitments, best efforts deals with less underwriting commitment, and club deals for smaller loans marketed to a select group of lenders.
This document discusses analyzing the relationship between underwriting techniques used by two credit managers at a mortgage company. It will examine if loans underwritten by one credit manager contain more conditions than the other, and if loans with higher credit grades or lower loan-to-value ratios receive fewer conditions. The analysis will involve comparing quantitative variables like credit grade, loan-to-value ratio, and number of conditions against each other using charts. It aims to determine if risk-based underwriting is consistently applied, or if one credit manager applies conditions inconsistently with risk levels.
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1. Financial Modeling Templates
Bond Valuation
http://spreadsheetml.com/finance/bondvaluationyieldtomaturity.shtml
Copyright (c) 2009, ConnectCode
All Rights Reserved.
ConnectCode accepts no responsibility for any adverse affect that may result from undertaking our
training.
Microsoft and Microsoft Excel are registered trademarks of Microsoft Corporation. All other product
names are trademarks, registered trademarks, or service marks of their respective owners
2. Table of Contents
1. Bond Valuation ...................................................................................................................... 1-1
1.1 Background ................................................................................................................ 1-1
2. Bond Valuation - Yield to Maturity ...................................................................................... 2-2
2.1 Input Values ............................................................................................................... 2-2
2.2 Output Values ............................................................................................................ 2-2
3. US Treasury Bond Yield Curve ............................................................................................ 3-4
4. Bond Valuation - Bond Price ............................................................................................... 4-5
4.1 Input Values ............................................................................................................... 4-5
4.2 Output Values ............................................................................................................ 4-5
4.2.1 Sensitivity Analysis ....................................................................................... 4-6
5. Customizing the Bond Valuation spreadsheet .................................................................. 5-7
5.1 Important fields in the spreadsheet ............................................................................ 5-7
5.1.1 Bond Valuatio-Yield - Coupon Payment Frequency (pf) field ....................... 5-7
5.1.2 Bond Valuatio-Yield -Yield to Maturity Type field .......................................... 5-7
5.1.3 Bond Valuation-Yield –Discount Rate per Period field ................................. 5-7
5.1.4 Bond Valuation-Yield – Yield to Maturity field ............................................... 5-8
5.1.5 Bond Valuation-Price: Bond Price field ......................................................... 5-8
5.1.6 Bond Valuation-Price: Sensitivity Analysis ................................................... 5-8
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3. ConnectCode’s Financial Modeling Templates
Have you thought about how many times you use or reuse your financial models? Everyday, day
after day, model after model and project after project. We definitely have. That is why we build all
our financial templates to be reusable, customizable and easy to understand. We also test our
templates with different scenarios vigorously, so that you know you can be assured of their
accuracy and quality and that you can save significant amount of time by reusing them. We have
also provided comprehensive documentation on the templates so that you do not need to guess or
figure out how we implemented the models.
All our template models are only in black and white color. We believe this is how a professional
financial template should look like and also that this is the easiest way for you to understand and
use the templates. All the input fields are marked with the ‘*’ symbol for you to identify them
easily.
Whether you are a financial analyst, investment banker or accounting personnel. Or whether you
are a student aspiring to join the finance world or an entrepreneur needing to understand finance,
we hope that you will find this package useful as we have spent our best effort and a lot of time in
developing them.
ConnectCode
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4. 1. Bond Valuation
1.1 Background
A bond is a financial instrument issued by the government or corporations when they need to
borrow money from the public on a long term basis to finance certain projects. Interest payments
called coupons are typically paid out to bond holders on a regular basis while the entire loan
amount called the Face or Par value is repaid at the end. The public can purchase a bond to collect
the regular interests and hold the bond to the end called the maturity date to collect the principal
amount. Otherwise, at any time before the maturity date, the bond holder can choose to sell the
bond in the market at a market price.
Bonds issued by the government are called treasury bonds while bonds issued by the state or local
government are called municipal bonds. Treasury bonds held to the maturity date are typically
considered riskless as a government can choose to issue more money if it is unable to repay the
coupons or the Face value. There is of course still a possibility that a new government regime may
choose not to recognize the bonds issued by the previous government.
The BondValuation.xls spreadsheet is created to value the price of a bond if the bond is sold in the
market before the maturity date. The most important factor affecting a bond price is the interest
rate. In rising interest rates, bond price will drop while in declining interest rates, bond price will
rise.
This spreadsheet also calculates the Yield to Maturity which is the interest rate that the bond
holder receives if he holds the bond to maturity. The spreadsheet distinguishes between the
Annual Percentage Rate and the Effective Annual Rate. When people talk about yield to maturity,
they typically refer to the Annual Percentage Rate. The Effective Annual Rate basically takes into
account the effect of compounding interests of the coupons.
Finally, this spreadsheet also illustrates how to plot the US Treasury Bond Yield Curve which is
used by many analysts for understanding the current conditions in the financial markets.
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5. 2. Bond Valuation - Yield to Maturity
The Yield to Maturity is a common yardstick that a bond investor uses to measure the value of a
bond. It is basically the rate of return, sometimes referred to the internal rate of return, when a
bond is held to maturity. In simple words, it is the interest rate you will receive if you hold the
bonds to the maturity date without selling it in the market. The Yield to Maturity is calculated in
the Bond Valuation-Yield worksheet.
2.1 Input Values
Coupon Payment Frequency (pf) - Whether the coupon is paid annually or semi-annually.
The coupon rate is typically stated in an annual percentage. Thus if a coupon is paid out
semi-annually, the coupon payments is equivalent to :
(Coupon Rate / 2) * Face Value of the Bond
Face Value (F) - The principal or loan amount of the bond to be repaid at the end of the
maturity period.
Number of Periods to Maturity (N) - This field is related to the Coupon Payment Frequency.
If Coupon Payment Frequency is set to Semi-Annually, Number of Periods means number
of Half-year period. If Coupon Payment Frequency is set to Annually, then Number of
Periods means number of One-year period. This field is used in the calculation of the
Bond’s Yield to Maturity.
Coupon Rate (I) - This is the stated annual interest rate payments for a Bond. This interest
rate multiply with the Face value gives the periodic coupon payments.
Bond Price (v) - The current price of the bond in the market. Bond prices fluctuates due to
changes in interest rates and the price that the bond is purchased affects the Yield to
Maturity.
Yield to Maturity Type – This Bond Valuation spreadsheet distinguishes between the Annual
Percentage Rate and the Effective Annual Rate. When people talk about yield to maturity,
they typically refer to the Annual Percentage Rate. The Effective Annual Rate basically
takes into account the effect of compounding interests of the coupons.
2.2 Output Values
Discount Rate per period (r) - Yield to Maturity is typically quoted like an Annual
Percentage Rate. This discount rate is the exact rate per period. For example, if the
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6. Coupon Payment Frequency is semi-annually, then this discount rate is the rate per six
months.
Yield to Maturity (Y) - The interest rate received if a bond is held to the maturity date.
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7. 3. US Treasury Bond Yield Curve
This worksheet plots the Yield Curve of the US Treasury Bonds. The Yield Curve is a chart showing
the relationship between the Time to Maturity versus the Yield to Maturity. It is typically used by
analysts to understand the conditions in the financial markets and the economy.
The Time to Maturity supported is listed below:
1 Month
3 Months
6 Months
1 Year
2 Years
3 Years
5 Years
7 Years
10 Years
20 Years
30 Years
Latest data on the Yield Curve can be obtained from the US Treasury website at:
http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
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8. 4. Bond Valuation - Bond Price
The Bond Valuation-Price worksheet uses the same fields as the Yield to Maturity worksheet. It
values the price of a bond based on the Yield to Maturity.
4.1 Input Values
Coupon Payment Frequency (pf) - Whether the coupon is paid annually or semi-annually.
The coupon rate is typically stated in an annual percentage. Thus if a coupon is paid out
semi-annually, the coupon payments is equivalent to :
(Coupon Rate / 2) * Face Value of the Bond
Yield to Maturity Type - The spreadsheet distinguishes between the Annual Percentage
Rate and the Effective Annual Rate. When people talk about yield to maturity, they
typically refer to the Annual Percentage Rate. The Effective Annual Rate basically takes
into account the effect of compounding interests of the coupons.
Yield to Maturity (Y) - The interest rate received if a bond is held to the maturity date.
Face Value (F) - The principal or loan amount of the bond to be repaid at the end of the
maturity period.
Number of Periods to Maturity (N) - This field is related to the Coupon Payment Frequency.
If Coupon Payment Frequency is set to Semi-Annually, Number of Periods means number
of Half-year period. If Coupon Payment Frequency is set to Annually, then Number of
Periods means number of One-year period. This field is used in the calculation of the bond
price.
Coupon Rate (I) - This is the stated annual interest rate payments for a Bond. This interest
rate multiply with the Face value gives the periodic coupon payments.
4.2 Output Values
Discount Rate per period (r) - Yield to Maturity is typically quoted like an Annual
Percentage Rate. This discount rate is the exact rate per period. For example, if the
Coupon Payment Frequency is set to Semi-Annually, then this discount rate is the rate per
six months.
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9. Bond Price (v) - The current valued price of the bond in the market.
4.2.1 Sensitivity Analysis
This Bond Vaulation-Price worksheet also uses Excel Data Table to perform sensitivity analysis on
the bond price by varying the Yield to Maturity. A data table is a range of cells that shows how
changing one or two variables in your formulas can affect the results of those formulas. Simply key
in different Yield to Maturity in the table to see how it affects on the Bond Price.
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10. 5. Customizing the Bond Valuation spreadsheet
5.1 Important fields in the spreadsheet
5.1.1 Bond Valuation-Yield - Coupon Payment Frequency (pf) field
The Coupon Payments Frequency field is defined using a control. The control’s Input Range(in the
Format Control->Control properties) is set to list the following selections. The selections are listed
in the Internal worksheet of the spreadsheet.
Annually
Semi-Annually
When a selection is made, the control will return a number to the cell below the control. The
number returned is used for calculating the Discount Rate per period.
Coupon Payments Frequency Number to return
Annually 1
Semi-Annually 2
Note : This field also appears in the Bond Valuation-Price worksheet.
5.1.2 Bond Valuation-Yield -Yield to Maturity Type field
The Yield to Maturity Type field is also defined using a control. The control is set to list the
following selections in the Internal worksheet.
Annual Percentage Rate
Effective Annual Rate
When a selection is made, the control will return a number to the cell below the control. The
number returned is used for calculating the Yield to Maturity.
Yield to Maturity Type Number to return
Annual Percentage Rate 1
Effective Annual Rate 2
Note : This field also appears in the Bond Valuation-Price worksheet. In this case, it is used for
calculating the Bond Price.
5.1.3 Bond Valuation-Yield –Discount Rate per Period field
This field uses Excel’s RATE formula which returns the interest rate per period of an annuity. The
RATE formula is defined as follow :
RATE(nper,pmt,pv,fv,type,guess)
nper is the number of payment periods in an annuity, pmt is the payment made during each
period of the annuity, pv is the present value which is the current bond price and fv is the future
value which is the Face value of the bond. type and guess is not used in our calculation.
The actual Discount Rate per Period is calculated as follows :
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11. RATE(Number of Periods to Maturity,Periodic Coupon Payments,-Current Bond Price,Face value of
the Bond)
5.1.4 Bond Valuation-Yield – Yield to Maturity field
The Yield to Maturity field uses the Discount Rate per Period field. When Yield to Maturity is
calculated as the Annual Percentage Rate, it is simply the Discount Rate per Period multiply with
the Coupon Payment Frequency. This is basically the discount rate per annum.
When the Effective Annual Rate is required, the following formula is used.
EXP(Coupon Payment Frequency*LN(Discount Rate per Period+1))-1
EXP – Exponent function
LN – Natural Logarithm function
5.1.5 Bond Valuation-Price - Bond Price field
The Bond Price is calculated as the sum of the Present Value of the coupons and the Present Value
of the Bond’s Face value. The coupon payments can be thought of as an annuity discounted using
the Time Value of Money concepts. The Present Value of the Bond’s Face Value is also calculated
by discounting the Face Value using the Time value of Money concepts.
The Bond Price is calculated using Excel’s PV (present value) formula. The formula is defined as
follows:
PV(rate,nper,pmt,fv,type)
rate is the interest rate per period, nper is the number of payment periods of an annuity, pmt is
the payment during each period of the annuity, fv is the future value, which is the Face value of
the bond and type is not used in our calculation.
The actual Bond Price is calculated as follow :
PV(Discount Rate per Period,Number of Periods to Maturity,-Periodic Coupon Payments,-Face
Value)
5.1.6 Bond Valuation-Price - Sensitivity Analysis
This Bond Valuation-Price worksheet uses Excel Data Table to perform sensitivity analysis on the
bond price by varying the Yield to Maturity. To create the Data Table, cell B21 is first defined as
the formula of the Bond Price which is exactly the same as cell E15.
The following steps are then carried out to create the Data Table in this worksheet.
1. Select the range B20 to G21
2. On the Data tab, in the Data Tools group, click What-If Analysis, and then click Data Table.
3. Set the Row input cell to E7
Similar steps are used to create the second Data Table in the worksheet.
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