Bonds

3/21/2015

杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

Corporate finance

Dr. DU Juan Mobile: 13918955188 Email: du.juan@tongji.edu.cn Literature available: jiaoxueziliao@outlook.com PW: tjdxcdhk508

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Valuing bonds • • • • • Valuing bonds with NPV How bond prices vary with interest rates The term structure of interest rates Explaining the term structure Real and nominal rates of interest

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杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

value bonds with NPV

杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

value bonds with NPV

Example If today is January 2006, what is the value of the following bond? A German Government bond (Bund) pays a 5 percent annual coupon every year for 6 years. The par value of the bond is 100 EURO.

Cash Flows (€) 2007 5 2008 5 2009 5 2010 5 2011 5 2012 105

What is the present value of these payoffs? • To determine that, you need to look at the return offered by similar securities. • In July 2006 other medium-term German government bonds offered a return of about 3.8%. That is what you were giving up when you bought the 5% bonds. Therefore, to value the 5% bonds, you must discount the cash flows at 3.8%:

PV 

5 5 5 5 5 105      106.33 1.038 1.0382 1.0383 1.0384 1.0385 1.0386

What is the present value of these payoffs?

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Bond prices are usually expressed as a percentage of face value. Thus we can say that your 5% bond is worth 106.33%.

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杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

value bonds with NPV

杜鹃 博士 银行与融资基金教席 Dr. DU Juan Lehrstuhl für Banken und Finanzierung

value bonds with NPV

Shortcut way to value this bond • Any bond can be valued as a package of an annuity (the coupon payments) and a single repayment (the repayment of the face value). • So this bond is like a package of two investment.:  The first investment pays...