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1、.1FINC311February 25, 2013.2Bond Definitions.3Bond definition (Merriam-Webster)1: something that binds or restrains2: a binding agreement : covenant; promise3. a : a band or cord used to tie something, b : a material or device for binding, c : an attractive force that holds together the atoms, ions,

2、 or groups of atoms in a molecule or crystal, d : an adhesive, cementing material, or fusible ingredient that combines, unites, or strengthens4: a uniting or binding element or force : tie 5. a : an obligation made binding by a money forfeit; also : the amount of the money guarantee, b : one who act

3、s as bail or surety, c : an interest-bearing certificate of public or private indebtedness, d : an insurance agreement pledging surety for financial loss caused to another by the act or default of a third person or by some contingency over which the third person may have no control6: the systematic

4、lapping of brick in a wall7: the state of goods made, stored, or transported under the care of bonded agencies until the duties or taxes on them are paid8: a 100-proof straight whiskey aged at least four years under government supervision before being bottled called also bonded whiskey.4Finance defi

5、nition of bondA bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed t

6、he maturity. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary markets. via wikipedia.5Key Features of a BondPar value: Face amount (sometimes principal)R

7、e-paid at maturity Assume $1,000 for corporate bondsCoupon interest rate: Stated interest rate Usually set equal to market required YTM at issueMultiply by par value to get coupon payment.6Key Features of a BondMaturity: Years until bond must be repaid Yield to maturity (YTM): The market required ra

8、te of return for bonds of similar risk and maturityThe discount rate used to value a bondReturn realized if bond is held to maturityUsually = coupon rate at issueQuoted as an APR.7Debt versus EquityDebt Not an ownership interestNo voting rightsInterest is tax-deductibleCreditors have legal recourse

9、if interest or principal payments are missedExcess debt can lead to financial distress and bankruptcyEquityOwnership interestCommon stockholders vote to elect the board of directors and on other issuesDividends are not tax deductibleDividends are not a liability of the firm until declared. Stockhold

10、ers have no legal recourse if dividends are not declaredAn all-equity firm cannot go bankrupt.8The Bond Indenture“Deed of Trust”Contract between issuing company and bondholders includes:Basic terms of the bondsTotal amount of bonds issuedSecured versus UnsecuredSinking fund provisionsCall provisions

11、 Deferred call Call premiumDetails of protective covenants.9Bond ClassificationsRegistered vs. Bearer BondsSecurityCollateral secured by financial securitiesMortgage secured by real property, normally land or buildingsDebentures unsecuredNotes unsecured debt with original maturity less than 10 years

12、SenioritySenior versus Junior, Subordinated.10Bond Characteristics and Required ReturnsCoupon rate (risk characteristics of the bond when issued)Usually market required yield to maturity at issueWhich bonds will have the higher coupon, all else equal?Secured debt versus a debentureSubordinated deben

13、ture versus senior debtA bond with a sinking fund versus one withoutA callable bond versus a non-callable bond.11Bond valuation.12Bond ValuationBond Value = PV(coupons) + PV(par)For zeroes, Bond value = PV(par)Bond Value = PV(annuity) + PV(lump sum)Remember: As interest rates increase present values

14、 decrease ( r PV )Therefore, as interest rates increase, bond prices decrease and vice versa.13The Bond-Pricing EquationPV(Annuity) +PV(lump sum)C = Coupon payment; F = Face valueBondValue=C1r-1r(1+r)t+F(1+r)tBond Value =.14Bond pricing examples.15Valuing zero coupon bondA bond pays the holder the $

15、1,000 face value of the bond in 16 years. The market requires an effective annual yield to maturity of 14%. What is the value of the bond?BondValue=F(1+r)t=1000(1.14)16= $122.89.16Valuing a coupon paying bond (1)The bond pays a semi-annual coupon at 12% APR and $1000 face value in 15 years at maturi

16、ty. What is the value of the bond if investors require 12% APR compounded semi-annually?C = 1000(.12/2) = $60t = 30 periodsr = .12/2 = .06 BondValue= 601.06-1.06(1.06)30+1000(1.06)30BondValue=825.89+174.11=1,000.00.17Valuing a coupon paying bond (2)The bond pays a semi-annual coupon at 12% APR and $

17、1000 face value in 15 years at maturity. What is the value of the bond if investors require 9% APR compounded semi-annually?C = 1000(.12/2) = $60t = 30 periodsr = .09/2 = .045 BondValue= 601.045-1.045(1.045)30+1000(1.045)30BondValue= 977.33+267=1,244.33.18Valuing a coupon paying bond (3)The bond pay

18、s a semi-annual coupon at 12% APR and $1000 face value in 15 years at maturity. What is the value of the bond if investors require 16% APR compounded semi-annually?C = 1000(.12/2) = $60t = 30 periodsr = .09/2 = .045 BondValue= 601.08-1.08(1.08)30+1000(1.08)30BondValue= 675.47+99.38= 774.85.6-19General Relationship Between Price and Yield-to-maturity6007008009001000110012001300140015000%2%4%6%8%10%12%14%Bond PriceYield-to-maturity.20Bond Prices: Relationship Between Coupon and YieldCoupon rate = YTM Price = ParCoupon rate YTM Price YTM Price Par“Premium bond” Why?.21Bond Value ($) v