文档介绍：Bond Market and Alternative Investment Rules
Valuation of Bonds
The Term Structure of Interest Rates
Alternative Investment Rules
(1) The Payback Period Rule
(2) The Average Accounting Return
(3) The Internal Rate of Return
(4) The Profitability Index
Why Present Value?
(RWJ ,6)
Valuation of Bonds
Example 1:
Suppose we observe the following bond prices for default-free zero coupon bonds (pure discount bond, with face value $1,000):
How are the bond prices related with interest rates?
1 year zero: Price = 926
2 year zero: Price = 842
3 year zero: Price = 758
4 year zero: Price = 683
1 year bond
2 year bond
3 year bond
4 year bond
y1
y2
y3
y4
i1
i2?
i4?
i3?
(maturity date)
The Present Value Formulas for Bonds
Pure Discount Bonds
Level Coupon Bonds
Consols
for T-maturity bonds with face value F.
Such a rate y is known as the yield to maturity (YTM). The yield to maturity is plicated average of different rates of interest. It can be a useful summary measure.
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Yield to Maturity
Example 1.(continued): we can convert bond prices into “yield to
maturity”( )
hence,

yn= yield of bonds with n periods as time to maturity, also called “spot rates.” Plot yn against time to maturity (n) ” yield curve” to summarize information about bond prices (diagram 1).
The Term Structure of Interest Rates
From bond prices, we pute yields , plot the “yield curve”, pute the implied forward rates, .
implied “forward rates”
yield curve or “spot rates”
Forward Rates
is the “break-even” interest rate that equates the returns on a n-period bond to that of a (n – 1) period bond rolled over into a one-year bond in year n.

For example, , (geometric mean) or
, so as an approximation (arithmetic mean).
Similarly,
Forecast of Future Interest
Can we use forward rates fn to forecast future short-term interest rates in, also called “short rates”? Assume that the investment horizon