Bond Bond Valuation
Bond Bond Valuation
Bond Bond Valuation
Preview
“ Equity is for Wealth creation and Debt is for wealth
Protection”
We focus on longer-term securities: bonds. Bonds are
like money market instruments, but they have maturities
that exceed one year. These include Treasury bonds,
corporate bonds and mortgages
Industry Overview
15.401
Corporate Securities
– Commercial paper
– Medium-term notes (MTNs)
– Corporate bonds
– ….
Municipal Securities
Mortgage-Backed Securities
Derivatives (CDO’s, CDS’s, etc.)
Industry
Overview
15.401
Asset-Backed, Municipal,
2,016.70, 8% 2,337.50, 9%
Money Treasury,
Markets, 4,283.80, 16%
3,818.90, 14%
Federal
Agency,
2,665.20, 10%
Mortgage-
Corporate, Related,
5,209.70, 19% 6,400.40, 24%
Slide 4
Industry
Overview
15.401
Courtesy of SIFMA. Used with permission. The Securities Industry and Financial Markets Association (SIFMA) prepared this
material for informational purposes only. SIFMA obtained this information from multiple sources believed to be reliable as of the date
of publication; SIFMA, however, makes no representations as to the accuracy or completeness of such third party information.
SIFMA has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any
such information becomes outdated, inaccurate, or incomplete.
Slide 5
Industry
Overview
15.401
M unicipal,
Asset-Backed,
265.3, 6%
674.6, 16%
Treasury,
Federal 599.8, 14%
Agency, 546.9,
13%
Corporate, Mortgage-
748.7, Related,
17% 1,475.30, 34%
Slide 6
Industry
Overview
15.401
Courtesy of SIFMA.Used with permission. The Securities Industry and Financial Markets Association (SIFMA) prepared this material
for informational purposes only. SIFMA obtained this information from multiple sources believed to be reliable as of the date of
publication; SIFMA, however, makes no representations as to the accuracy or completeness of such third party information. SIFMA
has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such
information becomes outdated, inaccurate, or incomplete
Slide 7
Industry
Overview
15.401
Courtesy of SIFMA. Used with permission. The Securities Industry and Financial Markets Association (SIFMA) prepared this
material for informational purposes only. SIFMA obtained this information from multiple sources believed to be reliable as of the date
of publication; SIFMA, however, makes no representations as to the accuracy or completeness of such third party information.
SIFMA has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any
such information becomes outdated, inaccurate, or incomplete.
Slide 8
Industry
Overview
15.401
Investors:
Issuers:
Intermediaries: Governments
Governments
Primary Dealers Pension Funds
Corporations
Other Dealers Insurance Companies
Commercial Banks
Investment Banks Commercial Banks
States
Credit-rating Agencies Mutual Funds
Municipalities
Credit Enhancers Hedge Funds
SPVs
Liquidity Enhancers Foreign Institutions
Foreign Institutions
Individuals
Slide 9
Types of Bonds:
Sample Corporate Bond
Types of Bonds:
Sample Corporate Bond
Figure 12.1 Hamilton/BP Corporate Bond
Bonds
Terminology
• Bond - Security that obligates the issuer to make
specified payments to the bondholder.
• Face value (par value or principal value) - Payment
at the maturity of the bond.
• Coupon - The interest payments made to the
bondholder.
• Coupon rate - Annual interest payment, as a
percentage of face value.
Bonds
WARNING
The coupon rate IS NOT the discount rate used in
the present value calculations.
• The coupon rate merely tells us what cash flow
the bond will produce
• Since the coupon rate is listed as a %, this
misconception is quite common
Valuing a Bond
The price of a bond is the present value of all
cash flows generated by the bond (i.e.
coupons and face value) discounted at the
required rate of return