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Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses. Readings: These are readings from business and academic publications that supplement the specific topic. Solutions: The solutions to each chapter are at the end of each chapter in the web site below.
Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need the password to download these as well. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel, and can be used on either a Mac or Windows system. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
Web Casts: These are webcasts of the lectures from the valuation class that I teach at Stern. You can use the lecture notes and the text book to follow the lectures. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. The supporting material includes: Chapter Outlines and overheads: These are saved as pdf files, and you need Adobe Acrobat to read them.
You can download Adobe Acrobat by going to the Adobe site. To go to overheads, click here. Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses. Readings: These are readings from business and academic publications that supplement the specific topic.
Solutions: The solutions to each chapter are at the end of each chapter in the web site below. Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need the password to download these as well. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel, and can be used on either a Mac or Windows system.
The same risk of not getting your money back applies to company bonds too. Companies do go bust and leave bondholders high and dry. Paying back the loan at the end of its life can be difficult sometimes as well. Bonds are often repaid by issuing new bonds to raise the cash. But what if no-one wants to lend the company fresh money? If the company is in good health this is not usually a problem.
But if the financial markets are in a state of panic — like in — it may be more difficult. Rising interest rates The prices of bonds usually move in the opposite direction to the changes in interest rates. They will not stay the same as before the increase in rates as people will not want to buy investments with low rates when they can get higher ones — for the same risk — elsewhere.
Rising inflation The whole point of investing is to grow the buying power of your money. Herein is the big problem of buying conventional bonds. As the cash flows of the bonds are fixed when it is first issued they will buy less when prices go up in the future. On the other hand, dividends paid to shareholders often go up in line with or by more than inflation if the company paying them can increase the prices for the stuff that it sells.
Bond investors are usually compensated for the risk of inflation by being offered a higher interest rate. The longer the life of the bond, the bigger the inflation risk and typically the higher the required interest rate. Higher inflation is therefore bad news for conventional bonds. Falling inflation or deflation falling prices though can make them more attractive because the cash from interest payments will buy more stuff.
Investors in bonds can also try to protect themselves from inflation by buying inflation-protected often referred to as indelinked bonds. With these bonds, the interest payments and the capital value of the bond are adjusted in line with an inflation index such as the retail prices index or RPI.
This allows the investor to maintain the buying power of their money. These bonds tend to be issued by governments but companies such as National Grid and Severn Trent have issued some as well. How bonds work In SharePad and ShareScope you get lots of information about individual government and corporate bonds. In this section, I am going to tell you what all this information means and why it is important.
Alternatively, it is sometimes called its redemption value, maturity value or face amount. This is usually their par value and what investors expect to get back when the bond matures. However, the nearer the bond gets to its maturity date, the closer the price gets to its par value as this is the amount that will be paid back. Maturity date This is when the par value is returned to investors.
For Treasury this will be on 7th December The Treasury bond has a coupon rate of 4. Most government bonds pay coupons twice a year. They are known as zero coupon bonds. The investor gets a return by buying the bond at a discount to its par value less than its par value.
The difference between the discounted value and the par value at maturity is the effective interest on the bond. The income yield is simply the coupon interest rate divided by the last closing price of the bond. This is where the gross redemption yield or yield to maturity comes in.
This yield takes into account the income received from coupons and the gain or loss on the par value when buying the bond at its current price over the remaining life of the bond. It gives a total return for an investor buying the bond today and holding it until it matures. For Treasury , the gross redemption yield is 2.
In a very rough and ready way, the gross redemption yield can be thought of as the sum of the income yield plus the capital gain or loss as a percentage of the current price divided by the number of years to maturity. This is how the Japanese version of the gross redemption yield is calculated.
So a rough approximation of the gross redemption yield is the income yield of 3. This is less than the quoted gross redemption yield of 2. For those of you who know a little bit about maths, the GRY is calculated using a process known as an internal rate of return IRR which factors in the timing of the coupons and when the par value is repaid. I am not going to get into the maths here but suggest that you base any decisions on the quoted gross redemption yield.
Accrued interest The dividend on a share is paid to the holder on the share register on the ex-dividend date. Bonds work slightly differently. The seller of the bond is entitled to their share of the interest for the period that they have owned the bond since the last coupon was paid. For the Treasury bond, the accrued interest is Dirty price Bonds have two prices — a clean and a dirty one.
The clean price is the quoted price that you see in SharePad. The dirty price is the clean price plus accrued interest. The relationship between bond prices and interest rates The price of a bond can change for different reasons but by far the biggest reason for any price change is a change in interest rates. Bond prices move in the opposite direction to a move in interest rates.
I like to think of this relationship as being similar to a see-saw — when one end is up the other end is down. Put another way: Bond prices rise when interest rates fall. Bond prices fall when interest rates rise. By understanding this it is possible to have a very simple rule for investing in bonds: Sell if you think interest rates are going up Buy if you think interest rates are going down.
But different bonds with different maturities and coupons will behave in a different way to changes in interest rates. Macaulay duration also known simply as duration essentially tells you how long it will take you to get your money back when you buy a bond. It is based on the weighted average of the cash flows of a bond its coupons and par value until maturity. Duration is influenced by the life of the bond and the size of the coupon.
So low-coupon, long-life bonds will have a longer duration than high-coupon, short-life bonds because it takes a longer time for the buyer to get their money back. Remember, the longer the duration the more sensitive the bond is to a change in interest rates. The Treasury bond has a long Macaulay duration of It has a Modified duration of That is a big price change and is a powerful illustration how lots of money can be made and lost by trading bonds.
Safest bonds receive AAA, D is extremely risky. When interest rates rise, the value of outstanding bonds falls. When interest rates rise, bond values drop, and when interest rates drop, bond values rise. Longer-term bonds fluctuate in price more than shorter-term bonds. When interest rates go down, bond prices go up, but upward price movement on bonds with a call provision is limited by the call price. If you expect interest rates to go down bond prices to rise —purchase bonds with long maturities and are not callable.
Similar to bonds—dividends are fixed, paid before common and no voting rights. As market interest rates rise and fall, the value of preferred stock moves in an opposite manner 36 Risks Associated with Preferred Stock If interest rates rise, the value of preferred stock drops. If interest rates drop, the value of preferred stock rises and it is called away. This is not investing—it is speculation. Collectibles may only have entertainment value. Hold bond until it matures—can get yield to maturity.
Gold, silver, gems, or collectibles are not investments but speculation.
a. Generate a two-period binomial tree of spot rates. b. Using a binomial tree approach, calculate the value of a three-period, option-. free bond paying a 5% coupon per period and with a face value of c. Using the binomial tree, calculate the value of the bond given it is callable with. a call price = CP = May 22, · Personal finance powerpoint chapter 13 1. Chapter 13 Investing in Bonds and Other Alternatives 2. Learning Objectives 1. Invest in the bond market. 2. Understand basic Missing: excel. 2. hospitals. this bond is repaid from an income generated by a project it is desiged to finance (Examples) General Obligation. bond is backed by the full faith and credit of the issuing Missing: excel.