Financial Institutions and Markets

1. Financial Institutions and Markets Dr. Andrew L. H. Parkes Day 3 “How do financial markets work?” 卜安吉

2. Chapter 3: Bond Calculations Bond Yields • Current Yield, p. 51-2 • Yield on a Discount Basis, p. 52-58 • Asked Yield • Covered in class. Money Financial Institutions & Markets, Ch. 3

3. Bond Yield Calculations • Bond yields are quoted using a variety of conventions, depending on both the type of issue and the market. • We examine three bond yield calculations commonly used for short and long-term debt. • Again see Chapter 3: pp. 51-58 Financial Institutions & Markets, Ch. 3

4. Bond Yield Calculations: Current Yield What is the current yield for a bond with a face value of $1,000, a current price of $921.01, and a coupon rate of 10.95%? Answer: ic = C / P = $109.50 / $921.01 = 11.89% Notes: C (coupon payment) = 10.95% x $1,000 = $109.50 The Asked Price is the buyer’s price! Financial Institutions & Markets, Ch. 3

5. Bond Yield Calculations: Yield on a Discount Basis What is the discount yield for a one-year bond with a face value of $1,000, and a current price of $875? Answer: idb = [ (F-P) / F ] x [ 360 / days to maturity] = [ (1000 – 875) / 1000 ] x [360 / 365] = 12.33% Dealer’s Spread = Profit = Pasked – Pbid Financial Institutions & Markets, Ch. 3

6. Asked Yield, the Bond Calculation from Financial Management Class • The Asked Yield is the Yield to Maturity – if you buy the Bond and hold it to maturity, this is the yield that you will receive. • This is the yield we calculated in Finance, the Introductory class. The formula may not include every coupon as you may buy the bond after it was initially sold, say for example in year 3 of a 5 year U.S. Treasury Note. TSE – Canada’s main stock/bond exchange Financial Institutions & Markets, Ch. 3