Bonds-and-Their-Valuatio課件

1、 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Bonds and Their ValuationKey Features of BondsBond ValuationMeasuring YieldAssessing Risk7-1Chapter 7 2013 Cengage Learning. All Rights Reserved. Ma

2、y not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.What is a bond?A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.7-2 2013 Cengage Learning. All Righ

3、ts Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Bond MarketsPrimarily traded in the over-the-counter (OTC) market.Most bonds are owned by and traded among large financial institutions.The Wall Street Journal reports key developm

4、ents in the Treasury, corporate, and municipal markets. Online edition lists trading each day for the most actively-traded investment-grade, high-yield, and convertible bonds.7-3 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible

5、 website, in whole or in part.Key Features of a BondPar value: face amount of the bond, which is paid at maturity (assume $1,000).Coupon interest rate: stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest.Maturity date: years until the bo

6、nd must be repaid.Issue date: when the bond was issued.Yield to maturity: rate of return earned on a bond held until maturity (also called the “promised yield”).7-4 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in w

7、hole or in part.Effect of a Call ProvisionAllows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor).Borrowers are willing to pay more, and lenders require more, for callable bonds.Most bonds have a deferred call and a declining call premium.7-5 2013 Cengage L

8、earning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.What is a sinking fund?Provision to pay off a loan over its life rather than all at maturity.Similar to amortization on a term loan.Reduces risk to investor, short

9、ens average maturity.But not good for investors if rates decline after issuance.7-6 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.How are sinking funds executed?Call x% of the issue at par, for s

10、inking fund purposes.Likely to be used if rd is below the coupon rate and the bond sells at a premium.Buy bonds in the open market.Likely to be used if rd is above the coupon rate and the bond sells at a discount.7-7 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicat

11、ed, or posted to a publicly accessible website, in whole or in part.The Value of Financial Assets7-8012Nr%CF1CFNCF2Value.NN2211r1CFr1CFr1CFalueV 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Othe

12、r Types (Features) of BondsConvertible bond: may be exchanged for common stock of the firm, at the holders option.Warrant: long-term option to buy a stated number of shares of common stock at a specified price.Putable bond: allows holder to sell the bond back to the company prior to maturity.Income

13、bond: pays interest only when interest is earned by the firm.Indexed bond: interest rate paid is based upon the rate of inflation.7-9 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.What is the opp

14、ortunity cost of debt capital?The discount rate (ri) is the opportunity cost of capital, and is the rate that could be earned on alternative investments of equal risk.ri = r* + IP + MRP + DRP + LP7-10 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to

15、 a publicly accessible website, in whole or in part.What is the value of a 10-year, 10% annual coupon bond, if rd = 10%?7-11012N10%100100 + 1,000100VB = ?.000, 1$V54.385$55.38$91.90$V10. 1$1,00010. 1$10010. 1$100VBB10101B 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or dup

16、licated, or posted to a publicly accessible website, in whole or in part.Calculating the Value of a BondThis bond has a $1,000 lump sum (the par value) due at maturity (t = 10), and annual $100 coupon payments beginning at t = 1 and continuing through t = 10, the price of the bond can be found by so

17、lving for the PV of these cash flows.Excel: =PV(.10,10,100,1000)7-12INPUTSOUTPUTNI/YRPMTPVFV1010100-10001000 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Whats the value of its 10-year bonds out

18、standing with the same risk but a 13% annual coupon rate?The annual coupon payment is $130. Since the risk is the same it has the same yield to maturity as the previous bond (10%). This bond sells at a premium because the coupon rate the yield to maturity. Excel: =PV(.10,10,130,1000)7-13INPUTSOUTPUT

19、NI/YRPMTPVFV1010130-1184.341000 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Whats the value of its 10-year bonds outstanding with the same risk but a 7% annual coupon rate?The annual coupon pay

20、ment is $70. Since the risk is the same it has the same yield to maturity as the previous bonds (10%). This bond sells at a discount because the coupon rate coupon rate.Excel: =RATE(10,90,-887,1000)7-18INPUTSOUTPUTNI/YRPMTPVFV10-8879010.911000 2013 Cengage Learning. All Rights Reserved. May not be s

21、canned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Find YTM If the Bond Price is $1,134.20Solving for I/YR, the YTM of this bond is 7.08%. This bond sells at a premium, because YTM 10% (the annual bonds effective rate), so you would prefer the semiannual b

22、ond.Would you prefer to buy a 10-year, 10% annual coupon bond or a 10-year, 10% semiannual coupon bond, all else equal?10.25%120.1011Mr1EFF%2MNOM7-30 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part

23、.If the proper price for this semiannual bond is $1,000, what would be the proper price for the annual coupon bond?The semiannual bond has a 10.25% effective rate, so the annual bond should earn the same EAR. At these prices, the annual and semiannual bonds are in equilibrium.Excel: =PV(.1025,10,100

24、,1000)7-31INPUTSOUTPUTNI/YRPMTPVFV10-984.8010010.251000 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.A 10-year, 10% semiannual coupon bond selling for $1,135.90 can be called in 4 years for $1,0

25、50, what is its yield to call (YTC)?The bonds yield to maturity is 8%. Solving for the YTC is identical to solving for YTM, except the time to call is used for N and the call premium is FV.Excel: =RATE(8,50,-1135.90,1050)7-32INPUTSOUTPUTNI/YRPMTPVFV8-1135.90503.5681050 2013 Cengage Learning. All Rig

26、hts Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Yield to Call3.568% represents the periodic semiannual yield to call.YTCNOM = rNOM = 3.568% x 2 = 7.137% is the rate that a broker would quote.The effective yield to call can be c

27、alculated.YTCEFF = (1.03568)2 1 = 7.26%Excel: =EFFECT(.07137,2)= 7.26%7-33 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.If you bought these callable bonds, would you be more likely to earn the Y

28、TM or YTC?The coupon rate = 10% compared to YTC = 7.137%. The firm could raise money by selling new bonds which pay 7.137%.Could replace bonds paying $100 per year with bonds paying only $71.37 per year.Investors should expect a call, and to earn the YTC of 7.137%, rather than the YTM of 8%.7-34 201

29、3 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.When is a call more likely to occur?In general, if a bond sells at a premium, then (1) coupon rd, so (2) a call is more likely.So, expect to earn:YTC on

30、 premium bonds.YTM on par and discount bonds.7-35 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Default RiskIf an issuer defaults, investors receive less than the promised return. Therefore, the

31、expected return on corporate and municipal bonds is less than the promised return.Influenced by the issuers financial strength and the terms of the bond contract.7-36 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in

32、 whole or in part.Types of BondsMortgage bondsDebenturesSubordinated debenturesInvestment-grade bondsJunk bonds7-37 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Evaluating Default Risk:Bond Rati

33、ngsInvestment GradeJunk BondsMoodysAaa Aa A BaaBa B Caa CS & PAAA AA A BBBBB B CCC C7-38Bond ratings are designed to reflect the probability of a bond issue going into default. 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessib

34、le website, in whole or in part.Factors Affecting Default Risk and Bond RatingsFinancial performanceDebt ratioTIE ratioCurrent ratioQualitative factors: Bond contract termsSecured vs. unsecured debtSenior vs. subordinated debtGuarantee and sinking fund provisionsDebt maturity7-39 2013 Cengage Learni

35、ng. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Other Factors Affecting Default RiskMiscellaneous qualitative factorsEarnings stabilityRegulatory environmentPotential antitrust or product liabilitiesPension liabiliti

36、esPotential labor problems7-40 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.BankruptcyTwo main chapters of the Federal Bankruptcy Act:Chapter 11, ReorganizationChapter 7, LiquidationFor large or

37、ganizations, reorganization occurs more frequently than liquidation, particularly in those instances where the business is worth more “alive than dead.”7-41 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 11 BankruptcyIf company cant meet its obligations It files under Chapter 11 to stop creditors from foreclosing, taking assets, and closing the