Derivatives
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Derivatives Lecture 7
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Derivatives. Lecture 7. Bond Prices. 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 - PowerPoint PPT Presentation
Transcript of Derivatives
DerivativesLecture 7
Bond PricesExample
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 FlowsSept 02 03 04 05 06115 115 115 115 1115
Bond PricesExample 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 $1000 and
retires the bond.The bond is rated AAA (WSJ AAA YTM is 7.5%)
84.161,1$
075.1
115,1
075.1
115
075.1
115
075.1
115
075.1
1155432
PV
Bond Prices & Yields
0
200
400
600
800
1000
1200
1400
1600
0 2 4 6 8 10 12 14
5 Year 9% Bond 1 Year 9% Bond
Yield
Price
Yield To Maturity 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)
Yield to Maturity
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?
Yield to Maturity
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?
C0 C1 C2 C3 C4 C5
-1078.80 105 105 105 105 1105
Calculate IRR = 8.5%
Bond Prices & Yields
0
200
400
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1000
1200
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0 2 4 6 8 10 12 14
5 Year 9% Bond 1 Year 9% Bond
Yield
Price
Bond Price Sensitivity
Bond A
YTM = 4.00%Maturity = 8 yearsCoupon = 6% or $60Par Value = $1,000
Price = $1,134.65
Bond B
YTM = 3.50%Maturity = 5 yearsCoupon = 7% or $70Par Value = $1,000
Price = $1,158.03
Bond Price Sensitivity
Bond A
YTM = 4.75%Maturity = 8 yearsCoupon = 6% or $60Par Value = $1,000
New Price= $1,081.61
Price dropped by 4.60 %
Bond B
YTM = 4.25%Maturity = 5 yearsCoupon = 7% or $70Par Value = $1,000
New Price =$1,121.57
Price dropped by 3.15 %
Yields increased 0.75%...prices dropped differently
Problems
Class examples
HomeworkFinCoach 5 Bond price problems 5 Bond YTM problems
