Investment analysis and portfolio management 8th reilly and brown chapter 17

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Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Eighth Edition by Frank K Reilly & Keith C Brown Chapter 17 Chapter 17 Bond Fundamentals Questions to be answered: • What are some of the basic features of bonds that affect their risk, return, and value? • What is the current country structure of the world bond market and how has the makeup of the global bond market changed in recent years? Chapter 17 Bond Fundamentals • What are the major components of the world bond market and the international bond market? • What are bond ratings and what is their purpose? • What is the difference between investment-grade bonds and high-yield (junk) bonds? Chapter 17 Bond Fundamentals • What are the characteristics of bonds in the major bond categories such as governments (including TIPS), agencies, municipalities, and corporates? • How does the makeup of the bond market in major countries such as the United States, Japan, the United Kingdom, and Germany differ? Chapter 17 Bond Fundamentals • What are the important characteristics of corporate bond issues developed in the United States during the past decade such as mortgage-backed securities, other assetbacked securities, zero-coupon and deep discount bonds, high-yield bonds, and structured notes? • How you read the quotes available for the alternative bond categories (e.g., governments, municipalities, corporates)? Basic Features of a Bond • Pay a fixed amount of interest periodically to the holder of record • Repay a fixed amount of principal at the date of maturity Basic Features of a Bond • Bond market is divided by maturity – Money Market - short-term issues that mature within one year – Notes - intermediate-term issues that mature between one and ten years – Bonds - long-term obligations with maturity greater than ten years • Remaining life (maturity) affect price volatility Bond Characteristics • Intrinsic features – – – – Coupon - yield (interest income) Maturity - term or serial (municipalities) Principal value - different from market value Type of ownership - bearer or registered • Types of Issues – Secured (senior) bonds – Unsecured bonds (debentures) – Subordinated (junior) debentures Bond Characteristics • Indenture provisions • Features affecting a bond’s maturity – – – – – Callable (call premium) Noncallable Deferred call Nonrefunding provision Sinking fund Rates of Return on Bonds HPR i, t = where: Pi, t +1 + Int i, t Pi, t HPRi,t = the holding period for bond i during the period t Pi,t+1 = the market price of bond i at the end of period t Pi,t = the market price of bond i at the beginning of period t Inti,t = the interest payments on bond i during period t The holding period yield (HPY) is: HPY = HPR - Corporate Bond Quotes Company (Ticker) Last Last EST UST EST $ Price Yield Spread Ford 7.45 July 16 2031 80.625 Issued by Ford Motor Company 9.461 503 30 VOL 213,645 Corporate Bond Quotes Company Last (Ticker) Price Yield Spread VOL 80.625 213,645 Ford 7.45 July 16 2031 The maturity date of this bond Last 9.461 EST UST EST $ 503 30 Corporate Bond Quotes Company Last (Ticker) Price Yield Spread VOL 80.625 213,645 Ford 7.45 July 16 2031 Last 9.461 EST 503 30 UST EST $ The last transaction price was 80.625 percent of par or $806.25, which implies an yield to maturity (YTM) for this bond of 9.461 percent Corporate Bond Quotes Company Last (Ticker) Price Yield Spread VOL 80.625 213,645 Ford 7.45 July 16 2031 Last 9.461 EST UST EST $ 503 30 The computed yield spread for the Ford bond is 503 basis points (5.03 basis points) Corporate Bond Quotes Company Last (Ticker) Price Yield Spread VOL 80.625 213,645 Ford 7.45 July 16 2031 Comparable U.S treasury Issue Last 9.461 EST UST EST $ 503 30 Corporate Bond Quotes Company Last (Ticker) Price Yield Spread VOL 80.625 213,645 Ford 7.45 July 16 2031 Last 9.461 EST UST EST $ 503 30 The trading volume for this bond is over $213 million Treasury and Agency Bond Quotes • Notations – “n” = treasury note – “i” = inflation-indexed issue – “p” = treasury note on which nonresident aliens are exempt from withholding taxes on interest • Quotes resemble those used for OTC securities because they contain both bid and ask prices Treasury and Agency Bond Quotes GOVT BONDS & NOTES Maturity Rate Mo/Yr Bid Asked 5.750 Nov 05n 101:05 101:06 Chg Ask Yld … 3.13 Treasury and Agency Bond Quotes GOVT BONDS & NOTES Maturity Rate Mo/Yr Bid Asked Chg Ask Yld 5.750 Nov 05n 101:05 101:06 … 3.13 This is a 5.75 percent obligation bond due in November 2005 The bid quote is 101:05, and the ask is 101:06 Treasury and Agency Bond Quotes • U.S Treasury Strips – “ci” is the coupon interest portion stripped from the note – “np” is the principal payment for the treasury note • Treasury Bills – Pure discount instrument - there is no coupon, they pay par at maturity – The bid-ask is not the price but the yield Municipal Bond Quotes 200 INDIANA ST OFFICE BLDG COMMN MBIA 0.000 07/01/10 5.60 BEARSTER Quote from The Blue List of Current Municipal Offerings $200,000 of Indiana State Office Building bonds Guaranteed by MBIA These are zero coupon bonds due July 1, 2010 The yield to maturity is given as 5.6% To determine the price you compute the discount value The dealer offering the bonds is Bear Sterns, listed in the back of the publication with their phone number Municipal Bond Quotes • Notations ETM = escrow till maturity M/S/F = mandatory sinking fund (C97) = this bond became callable in 1997 When the market yield equals the coupon rate, the price is 100 and they are referred to as dollar bonds “+” in the left column indicates a new item “#” before yield to maturity or price indicates a change The Internet Investments Online http://www.bondheads.com http://www.investinginbonds.com http://www.fitch.com http://www.moodys.com http://www.standardandpoors.com/ratings http://www.bradynet.com http://www.publicdebt.treas.gov End of Chapter 17 –Bond Fundamentals Future topics Chapter 18 • The Analysis and Valuation of Bonds ... bond market? • What are bond ratings and what is their purpose? • What is the difference between investment- grade bonds and high-yield (junk) bonds? Chapter 17 Bond Fundamentals • What are the... world bond market and how has the makeup of the global bond market changed in recent years? Chapter 17 Bond Fundamentals • What are the major components of the world bond market and the international... municipalities, and corporates? • How does the makeup of the bond market in major countries such as the United States, Japan, the United Kingdom, and Germany differ? Chapter 17 Bond Fundamentals
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