Just Did It Cause

Bond and stocks

Indentures: May include restrictions or requirements ;Assets: acquisition and disposition of assets • Dividends: dividend payments • Financing: additional debt • Financial ratios: current ratio, leverage ratio, etc • Sinking funds: payment of the principle • Bonding mechanism: an independent auditor, a trustee for bondholders, etc.

Types -Callable/puttable bonds • Convertible bonds/conversion premium •Floating rate bonds/reverse floaters •Preferred stocks •Foreign bonds/Eurobonds •Asset-backed bonds • Indexed/structured bonds

Bond Pricing between Coupon Dates • Invoice price = Flat price + Accrued interest (AI=C/2xdays since last/days between) w=days since/days between

Bond prices Prices fall as market interest rate rises • Interest rate fluctuations are primary source of bond market risk •Bonds with longer maturities more sensitive to fluctuations in interest rate

Yield to Maturity • Discount rate that makes present value of bond’s payments equal to price. • Average rate of return if bond is held to maturity and all coupon payments are reinvested at YTM

A bond’s YTM is based on its current price, therefore changes over time • YTM and the purchase price •YTM is not the actual realized yield because reinvestment rate ≠ YTM •The realized yield is based on the actual reinvestment rate and the total cash received at maturity example-

30×(1.02×1.0252^2×1.032^2) + 30×(1.0252^2×1.032^2)

+ 30×(1.025×1.032^2) + 30×(1.032^2) + 30×1.03 +

1030 = 1192.89

• 1028.68×(1+yrealized)6 = 1192.89.

•Yrealized = 2.4991% (versus YTM = 2.48%).

Bond Equivalent Yield: half yearly YTM*2

• Effective Annual Yield: (1+ half yearly YTM)2 – 1

• Premium bonds- coupon rate > current yield > YTM

• Discount bonds- coupon rate < current yield < YTM

HPR = (coupon + capital gain) / original investment

Bond Risk • Default risk • Default premium = YTM of corporate bonds – YTM of T-bonds • Interest risk • Changes in market interest rates • Nominal interest...