Lecture 7. Bond Prices Example If today is October 2001, what is the value of the following bond? An IBM Bond pays $115 every Sept for 5 years. In Sept.

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Presentation transcript:

Lecture 7

Bond Prices Example If today is October 2001, what is the value of the following bond? An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond. The bond is rated AAA (WSJ AAA YTM is 7.5%) Cash Flows Sept

Bond Prices Example continued If today is October 2001, what is the value of the following bond? An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond. The bond is rated AAA (WSJ AAA YTM is 7.5%)

Bond Prices & Yields Yield Price

Yield To Maturity  All interest bearing instruments are priced to fit the term structure  This is accomplished by modifying the asset price  The modified price creates a New Yield, which fits the Term Structure  The new yield is called the Yield To Maturity (YTM)

Yield to Maturity Example  A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is , what is the YTM?

Yield to Maturity Example  A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is , what is the YTM? C0C1C2C3C4C Calculate IRR = 8.5%

Bond Prices & Yields Yield Price

Bond A YTM = 4.00% Maturity = 8 years Coupon = 6% or $60 Par Value = $1,000 Price = $1, Bond B YTM = 3.50% Maturity = 5 years Coupon = 7% or $70 Par Value = $1,000 Price = $1,158.03

Bond A YTM = 4.75% Maturity = 8 years Coupon = 6% or $60 Par Value = $1,000 New Price= $1, Price dropped by 2.30 % Bond B YTM = 4.25% Maturity = 5 years Coupon = 7% or $70 Par Value = $1,000 New Price =$1, Price dropped by 3.15 % Yields increased 0.75%...prices dropped differently

 Class examples Homework FinCoach  5 Bond price problems  5 Bond YTM problems