文档介绍：8
Bond Valuation
and Risk
Chapter Objectives
Demonstrate how bond market prices are established and influenced by interest rate movements
Identify the factors that affect bond prices
Explain how the sensitivity of bond prices to interest rates is dependent on particular bond characteristics
Explain the benefits of diversifying the bond portfolio internationally
Bond Valuation Process
Bonds are debt obligations with long-term maturities issued by governments or corporations to obtain long-term monly purchased by financial institutions that wish to invest funds for long-term periods
Bond price (value) = present value of cash flows to be generated by the bond
Bond Valuation Process
Impact of the Discount Rate on Bond Valuation
Discount rate = market-determined yield that could be earned on alternative investments of similar risk and maturity
Bond prices vary inversely with changes in market interest rates
Cash flows are contractual and remain the same each period
Bond prices vary to provide the new owner the market rate of return
Bond Risks and Prices
Higher risk
Higher discount rates
Lower bond prices
Lower risk
Lower discount rates
Higher bond prices
Note Inverse Relationship
Between Risk, required returns
and Bond Prices
Bond Valuation Process
Bond Price = present value of cash flows discounted at the market required rate of return
C = Coupon per period (PMT)
Par = Face or maturity value (FV)
i = Discount rate (i)
n = Compounding periods to maturity
PV =
C
(1+ i)1
+
(1+ i)2
(1+ i)n
C
C + Par
+ …
Bond Valuation Process
Consider a $1000, 10% coupon (paid annually) bond that has three years remaining to maturity. Assume the prevailing annualized yield on other bonds with similar risk is 12 percent. Calculate the bond’s value.
The expected cash flows of a coupon bond includes periodic interest payments, and…
A final $1000 payoff at maturity
Discounted at the market rate of return of 12%
Bond Valuation Process
PV = $100/(1+.12)1 + $100/(1+.1