musings of a budding social entrepeneur

Tuesday, October 13, 2009

Chapter 6 - Valuing Bonds

Def - Bond: a security that obligates the issuer to make specified payments to the bondholder

Def - Face Value: payment at the maturity of the bond. Also called the 'principal' or 'par value'

Def - coupn: The interest payments paid to the bondholder.

Terminology "The 5s of 2011" is the 5% coupon bonds maturing in 2011.

Calculating the present value of a bond.

PV = PV(Coupons issued over time) + PV(Face value of the bond)
= (coupon X annuity factor) + (FV X Discount factor)
=  Coupon [1/r - 1/r(1+r)^t] + FV x (1/r^t)

6.3 yield to maturity

Def current yield = annual coupon payments divided by bond price - thiis not really good for anythign besides telling you how much you'll get this year.

Def yield to maturity = interest rate for which the PV of teh bond's payments equals the price

Def Rate of return = Total income per period per dollar invested

Def Default (or credit) risk: The risk that a bond issuer may default on its bonds. This is relevant to corporate bond issuers, not so much national governments

Def default premium: the additional yield on a bond that investors require for bearing credit risk.

Def Investment grade: Bonds are rated by Moody's or S&P's. from Triple A: Aaa, Aa, A.Baa...
Bonds rated Baa and above are Investment grade (according to Moody's). BBB and above are investmetn grade for S&P (as opposed to Junk  Bonds) see table 6.2 for ratings



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