- 60 Views
- Uploaded on
- Presentation posted in: General

Derivatives

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Derivatives

Lecture 7

Example

If today is October 2001, what is the value of the following bond?

An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond.

The bond is rated AAA (WSJ AAA YTM is 7.5%)

Cash Flows

Sept 0203040506

1151151151151115

Example continued

If today is October 2001, what is the value of the following bond?

An IBM Bond pays $115 every Sept for 5 years. In Sept 2006 it pays an additional $1000 and retires the bond.

The bond is rated AAA (WSJ AAA YTM is 7.5%)

Price

Yield

All interest bearing instruments are priced to fit the term structure

This is accomplished by modifying the asset price

The modified price creates a New Yield, which fits the Term Structure

The new yield is called the Yield To Maturity (YTM)

Example

A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is 107.88, what is the YTM?

Example

A $1000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is 107.88, what is the YTM?

C0C1C2C3C4C5

-1078.801051051051051105

Calculate IRR = 8.5%

Price

Yield

Bond B

YTM = 3.50%

Maturity = 5 years

Coupon = 7% or $70

Par Value = $1,000

Price = $1,158.03

Bond A

YTM = 4.00%

Maturity = 8 years

Coupon = 6% or $60

Par Value = $1,000

Price = $1,134.65

Bond B

YTM = 4.25%

Maturity = 5 years

Coupon = 7% or $70

Par Value = $1,000

New Price =$1,121.57

Price dropped by 3.15 %

Bond A

YTM = 4.75%

Maturity = 8 years

Coupon = 6% or $60

Par Value = $1,000

New Price= $1,108.61

Price dropped by 2.30 %

Yields increased 0.75%...prices dropped differently

- Class examples
Homework

FinCoach

- 5 Bond price problems
- 5 Bond YTM problems