The document contains a table listing bond quotes including the bond name, coupon interest rate, current yield, daily trading volume, closing price and change from the previous day's closing price. It also provides definitions for some of the columns including coupon interest rate, year of maturity, current yield, daily trading volume and closing price. Additionally, it includes examples of calculating bond valuation for IBM bonds that pay interest annually and Kroger bonds that pay interest semi-annually. The examples show the cash flows and calculations to compute the intrinsic value of the bonds given a required rate of return.
The document contains a table listing bond quotes including the bond name, coupon interest rate, current yield, daily trading volume, closing price and change from the previous day's closing price. It also provides definitions for some of the columns including coupon interest rate, year of maturity, current yield, daily trading volume and closing price. Additionally, it includes examples of calculating bond valuation for IBM bonds that pay interest annually and Kroger bonds that pay interest semi-annually. The examples show the cash flows and calculations to compute the intrinsic value of the bonds given a required rate of return.
The document contains a table listing bond quotes including the bond name, coupon interest rate, current yield, daily trading volume, closing price and change from the previous day's closing price. It also provides definitions for some of the columns including coupon interest rate, year of maturity, current yield, daily trading volume and closing price. Additionally, it includes examples of calculating bond valuation for IBM bonds that pay interest annually and Kroger bonds that pay interest semi-annually. The examples show the cash flows and calculations to compute the intrinsic value of the bonds given a required rate of return.
The document contains a table listing bond quotes including the bond name, coupon interest rate, current yield, daily trading volume, closing price and change from the previous day's closing price. It also provides definitions for some of the columns including coupon interest rate, year of maturity, current yield, daily trading volume and closing price. Additionally, it includes examples of calculating bond valuation for IBM bonds that pay interest annually and Kroger bonds that pay interest semi-annually. The examples show the cash flows and calculations to compute the intrinsic value of the bonds given a required rate of return.
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Bond Quotes
Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Coupon Interest Rate
Determines the Investor’s Periodic Cash Flow
Cash Flow = Interest Payment = Coupon Rate x Par = .06375 x 1000 = $63.75/Year Bond Quotes Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Year of Maturity
Determines the Time frame for the Investment
00 = year 2000, therefore in 1995 this is a 5 year investment Bond Quotes Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Current Yield (%)
Anuual $ Coupon = 63.75 Current Yield = = .066 = 6.6% Market Price 966.25 Bond Quotes Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Daily Trading Volume
Bond Quotes Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Daily Closing Market Price
Expressed as a % of Par $Price = (96x8) +5 = 773/8 divided by 100 times 1000 = $966.25 Bond Quotes Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
Change from Previous Day’s Closing Price
Bond Valuation Model IBM Bond Timeline: Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
1000.00 Bond Valuation Model Compute Bond’s Intrinsic Value 1995 1996 1997 1998 1999 2000
0 1 2 3 4 5
63.75 63.75 63.75 63.75 63.75
1000.00 $59.03 $54.66 $50.61 $46.86 $43.39 $1000 (1.08) 5 $680.58 $935.12 Compute Compute the theIntrinsic IntrinsicValue Value for for the the IBM IBM Bond Bondgiven giventhat that you yourequire requireaa8% 8%return returnon onyour yourinvestment. investment. Bond Valuation Model Compute Bond’s Intrinsic Value 1995 1996 1997 1998 1999 2000
0 1 2 3 4 5
63.75 63.75 63.75 63.75 63.75
1000.00 $63.75 $63.75Annuity Annuityfor for55 years years $1000 $1000Lump LumpSum Sum in in55years years Vb = I(PV of Annuity) + PV of Par = 63.75( 1 1 5 ) + 1000 5 .08 .08(1+.08) (1+.08) = 63.75(3.9927) + 680.58 = 254.54 + 680.58 = 935.12 Bond Valuation Model Some Bonds Pay Interest Semi-Annually: Cur Net Bonds Yld Vol Close Chg AMR6¼24 cv 6 91¼ -1½ ATT 8.35s25 8.3 110 102¾ +¼ IBM 63/8 00 6.6 228 965/8 -1 / 8 Kroger 9s99 8.8 74 1017/8 -¼
Source: Wall Street Journal
1995 1996 1997 1998 1999 2000
0 1 2 3 4 5
45 45 45 45 45 45 45 45.00 1000.00 Rather Ratherthan thanreceiving receiving44annual annualpayments paymentsof of $90, $90,the the bondholder bondholder will willreceive receive 4x2 4x2== 88semiannual semiannual payments payments of of 90÷2=$45. 90÷2=$45. Bond Valuation Model Some Bonds Pay Interest Semi-Annually: 1995 1996 1997 1998 1999 2000
0 1 2 3 4 5
45 45 45 45 45 45 45 45.00 1000.00 Compute Computethe theIntrinsic IntrinsicValue Valuefor for the theKroger Kroger Bond Bondgiven given that that you yourequire requireaa10% 10%return returnon onyour your investment. investment. Since interest is received every 6 months, need to use semi-annual compounding 1 1 1000 Vb = 45( .05 .05(1+.05) 8) + (1+.05) 8
Semi-Annual 10% 10% Compounding 22 Bond Valuation Model Some Bonds Pay Interest Semi-Annually: 1995 1996 1997 1998 1999 2000
0 1 2 3 4 5
45 45 45 45 45 45 45 45.00 1000.00 Compute Computethe theIntrinsic IntrinsicValue Valuefor for the theKroger Kroger Bond Bondgiven given that that you yourequire requireaa10% 10%return returnon onyour your investment. investment. Since interest is received every 6 months, need to use semi-annual compounding 1 1 1000 Vb = 45( .05 .05(1+.05) 8) + (1+.05) 8
=45(6.4632) + 676.84 = 290.85 + 676.84 = 967.68 Interest Rate Risk Bond Prices fluctuate over Time • As interest rates in the economy change, required rates on bonds will also change resulting in investor’s intrinsic values changing and market prices changing.
Interest Rates Vb Interest Rate Risk Bond Prices fluctuate over Time • As interest rates in the economy change, required rates on bonds will also change resulting in investor’s intrinsic values changing and market prices changing.
Interest Rates Vb
Interest Rates Vb Interest Bond Rate over Prices fluctuate Risk Time • When bonds are originally issued, the coupon rate is set to match current prevailing rates. • Over time, the prevailing rates may change, but the coupon rate is fixed. • Resulting in the actual price of the bond changing.
= $743.69 Interest 1995 RateareRisk AAA Bonds currently yielding 6%
Purchase ATT 6s2015 Bond for $1000.00
1998 AAA Bonds are currently yielding 9%
If you want to sell the the ATT 6s2015 Bond, it must be priced to earn the purchaser a competitive rate (required rate = 9%) Market Price for ATT6s2015 is now $743.69
2001 AAA Bonds are currently yielding 5%
If you want to sell the the ATT 6s2015
Bond, it must be priced to earn the purchaser a competitive rate (required rate = 5%)
If you want to sell the the ATT 6s2015 Bond, it must be priced to earn the purchaser a competitive rate (required rate = 9%) Market Price for ATT6s2015 is now $743.69
2001 AAA Bonds are currently yielding 5%
Bond Prices fall during If you want to sell the the ATT 6s2015 periods of rising interest Bond, it must be priced to earn the purchaser a competitive rate (required rates and rise during rate = 5%) periods of falling interest Market Price for ATT6s2015 is now rates. $1,098.99
