投资学全英文ppt12.ppt

Chapter 11Bond ValuationCopyright 2014 Pearson Education,Inc.All rights reserved.11-2 Bond Valuation and AnalysisLearning Goals1.Explain the behavior of market interest rates and identify the forces that cause interest rates to change.2.Describe the term structure of interest rates and note how yield curves can be used by investors.3.Understand how bonds are valued in the marketplace.Copyright 2014 Pearson Education,Inc.All rights reserved.11-3 Bond Valuation and AnalysisLearning Goals (contd)4.Describe the various measures of yield and return and explain how these standards of performance are used in bond valuation.5.Understand the basic concept of duration,how it can be measured,and its use in the management of bond portfolios.6.Discuss various bond investment strategies and the different ways these securities can be used by investors.Copyright 2014 Pearson Education,Inc.All rights reserved.11-4 For bonds,the risk premium depends upon:the default,or credit,risk of the issuer the term-to-maturity any call risk,if applicableMeasuring ReturnRequired Return:the rate of return an investor must earn on an investment to be fully compensated for its riskCopyright 2014 Pearson Education,Inc.All rights reserved.11-5 Major Bond SectorsBond market is comprised of a series of different market sectors:U.S.Treasury issuesMunicipal bond issuesCorporate bond issuesDifferences in interest rates between the various market sectors are called yield spreadsCopyright 2014 Pearson Education,Inc.All rights reserved.11-6 Factors Affecting Yield SpreadsMunicipal bond rates are usually 20-30%lower than corporate bonds due to tax-exempt featureTreasury bonds have lower rates than corporate bonds due to no default riskThe lower the credit rating(and higher the risk),the higher the interest rateDiscount(low-coupon)bonds yield less than premium(high-coupon)bondsCopyright 2014 Pearson Education,Inc.All rights reserved.11-7 Factors Affecting Yield Spreads(contd)Revenue municiple bonds yield more than general obligation municiple bonds due to higher riskFreely callable bonds yield higher than noncallable bondsBonds with longer maturities generally yield more than shorter maturitiesCopyright 2014 Pearson Education,Inc.All rights reserved.11-8 Interest rates go G,bond prices go HInterest rates go H,bond prices go GWhat is the single biggest factor that influences the price of bonds?Interest RatesCopyright 2014 Pearson Education,Inc.All rights reserved.11-9 What is the single biggest factor that influences the direction of interest rates?InflationInflation goes G,interest rates go GInflation goes H,interest rates go HCopyright 2014 Pearson Education,Inc.All rights reserved.11-10 Figure 11.1 The Impact of Inflation on the Behavior of Interest RatesCopyright 2014 Pearson Education,Inc.All rights reserved.11-11 Economic Variables that Affect Interest Rates EconomicInterestRateVariableChangeEffectChange in money supplySlow increaseDecreaseSlow decreaseIncreaseChange in money supplyFast increase IncreaseFast decrease DecreaseFederal BudgetDeficitIncreaseSurplusDecreaseU.S.Economic ActivityRecessionDecreaseExpansionIncreaseCopyright 2014 Pearson Education,Inc.All rights reserved.11-12 Economic Variables that Affect Interest Rates(contd)EconomicInterestRateVariableChangeEffectFederal Reserve PoliciesSlower growthDecreaseFaster growthIncrease Foreign Interest Rates HigherIncreaseLowerDecrease Copyright 2014 Pearson Education,Inc.All rights reserved.11-13 Term Structure of Interest Ratesand Yield CurvesTerm Structure of Interest Rates:relationship between the interest rate or rate of return(yield)on a bond and its time to maturityYield Curve:a graph that represents the relationship between a bonds term to maturity and its yield at a given point in timeCopyright 2014 Pearson Education,Inc.All rights reserved.11-14 Figure 11.2 Two Types of Yield CurvesCopyright 2014 Pearson Education,Inc.All rights reserved.11-15 Theories on Shape of Yield Curve Slope of yield curve affect by:Investors expectations regarding the future behavior of interest ratesLiquidity preferences of investorsMarket segmentation(supply and demand for bonds of different maturities)Copyright 2014 Pearson Education,Inc.All rights reserved.11-16 Theories on Shape of Yield Curve(contd)Expectations HypothesisShape of yield curve is based upon investor expectations of future behavior of interest ratesWhen investors expect interest rates to go up,they will only purchase long-term bonds if those bonds offer higher yields than short-term bonds;hence the yield curve will be upward slopingWhen investors expect interest rates to go down,they will only purchase short-term bonds if those bonds offer higher yields than long-term bonds;hence the yield curve will be downward slopingCopyright 2014 Pearson Education,Inc.All rights reserved.11-17 Theories on Shape of Yield Curve(contd)Liquidity Preference TheoryShape of yield curve is based upon the difference in risk between short-term and long-term bondsIf investors view long-term bonds as being riskier than short-term bonds,then rates on long-term bonds must be higher than rates on short-term bondsInvestors may view long-term bonds as being riskier because long-term bonds are less liquid and are subject to greater interest rate riskCopyright 2014 Pearson Education,Inc.All rights reserved.11-18 Theories on Shape of Yield Curve(contd)Market Segmentation TheorySuggests that the bond market consists of distinct segments(based on maturity)due to the preferences of investors and borrowersSupply and demand for funds in these distinct segments determine the level of short-and long-term interest ratesTherefore,an upward sloping yield curve is not a sign that investors expect rates to rise or a sign that investors see long-term bonds as being riskier than short-term bondsInstead,an upward sloping curve means that the supply of short-term funds is high relative to borrowers needs,so rates on short-term bonds are lower than rates on long-term bondsCopyright 2014 Pearson Education,Inc.All rights reserved.11-19 Interpreting Shape of Yield Curve Upward-sloping yield curves result from:Expectation of rising interest ratesLender preference for shorter-maturity loansGreater supply of shorter-term loansFlat or downward-sloping yield curves result from:Expectation of falling interest ratesLender preference for longer-maturity loansGreater supply of longer-term loansCopyright 2014 Pearson Education,Inc.All rights reserved.11-20 Basic Bond Investing StrategyIf you expect interest rates to increase,buy short-term bondsIf you expect interest rates to decrease,buy long-term non-callable bondsCopyright 2014 Pearson Education,Inc.All rights reserved.11-21 The Pricing of BondsBonds are priced according to the present value of their future cash flow streamsCopyright 2014 Pearson Education,Inc.All rights reserved.11-22 The Pricing of Bonds(contd)Bond prices are driven by market yieldsAppropriate yield at which the bond should sell is determined before price of the bondRequired rate of return is determined by market,economic and issuer characteristicsRequired rate of return becomes the bonds market yieldMarket yield becomes the discount rate that is used to value the bondCopyright 2014 Pearson Education,Inc.All rights reserved.11-23 The Pricing of Bonds(contd)Bond prices are comprised of two components:Present value of the annuity of coupon payments,plusPresent value of the single cash flow from repayment of the principal at maturityCompounding refers to frequency coupons are paidAnnual compounding:coupons paid once per yearSemi-annual compounding:coupons paid every six monthsCopyright 2014 Pearson Education,Inc.All rights reserved.11-24 The Pricing of Bonds(contd)Bond Pricing Example:What is the market price of a$1,000 par value 20 year bond that pays 9.5%compounded annually when the market rate is 10%?Copyright 2014 Pearson Education,Inc.All rights reserved.11-25 Ways to Measure Bond YieldCurrent yieldYield-to-MaturityYield-to-Call Expected ReturnCopyright 2014 Pearson Education,Inc.All rights reserved.11-26 Current YieldSimplest yield calculationOnly looks at current incomeCopyright 2014 Pearson Education,Inc.All rights reserved.11-27 Yield-to-MaturityMost important and widely used yield calculationTrue yield received if the bond is held to maturityAssumes all interest income is reinvested at rate equal to market rate at time of YTM calculationno reinvestment riskCalculates value based upon PV of interest received and the appreciation of the bond if held until maturityDifficult to calculate without a financial calculatorCopyright 2014 Pearson Education,Inc.All rights reserved.11-28 Yield-to-Maturity(contd)Yield-to-Maturity Example:Find the yield-to-maturity on a 7.5%($1,000 par value)bond that has 15 years remaining to maturity and is currently trading in the market at$809.50?Copyright 2014 Pearson Education,Inc.All rights reserved.11-29 Yield-to-CallSimilar to yield-to-maturityAssumes bond will be called on the first call dateUses bonds call price(premium)instead of the par valueTrue yield received if the bond is held to callCopyright 2014 Pearson Education,Inc.All rights reserved.11-30 Yield-to-Call(contd)Yield-to-Call Example:Find the yield-to-call of a 20-year,10.5%bond that is currently trading at$1,204,but can be called in 5 years at a call price of$1,085?Copyright 2014 Pearson Education,Inc.All rights reserved.11-31 Expected ReturnUsed by investors who expect to actively trade in and out of bonds rather than hold until maturity dateSimilar to yield-to-maturityUses estimated market price of bond at expected sale date instead of the par valueCopyright 2014 Pearson Education,Inc.All rights reserved.11-32 Expected Return(contd)Expected Return Example:Find the expected return on a 7.5%bond that is currently priced in the market at$809.50 but is expected to rise to$960 within a 3-year holding period?Copyright 2014 Pearson Education,Inc.All rights reserved.11-33 Bond DurationBond Duration:A measure of bond price volatility,which captures both price and reinvestment risk and which is used to indicate how a bond will react in different interest rate environmentsCopyright 2014 Pearson Education,Inc.All rights reserved.11-34 Bond Duration(contd)Improvement over yield-to-market because factors in reinvestment riskCompares the sensitivity to changes in interest ratesBond Duration is the average amount of time that it takes to receive the interest and the principalCalculates the weighted average of the cash flows(interest and principal payments)of the bond,discounted to the present timeCopyright 2014 Pearson Education,Inc.All rights reserved.11-35 The Concept of Duration Generally speaking,bond duration possesses the following properties:Bonds with higher coupon rates have shorter durationsBonds with longer maturities have longer durationsBonds with higher YTM lead to shorter durationsCopyright 2014 Pearson Education,Inc.All rights reserved.11-36 The Concept of Duration(contd)Bond duration is a better indicator than bond maturity of impact of interest rates on bond price(price volatility)If interest rates are going up,hold bonds with short durationsIf interest rates are going down,hold bonds with long durationsCopyright 2014 Pearson Education,Inc.All rights reserved.11-37 Measuring DurationSteps in calculating durationStep 1:Find present value of each coupon or principal paymentStep 2:Divide this present value by current market price of bondStep 3:Multiple this ratio by the year in which the bond makes each cash paymentStep 4:Repeat steps 1 through 3 for each year in the life of the bond then add up the values computed in Step 3Copyright 2014 Pearson Education,Inc.All rights reserved.11-38 Table 11.1 Duration Calculation for a 7.5%,15-Year Bond Priced to Yield 8%Copyright 2014 Pearson Education,Inc.All rights reserved.11-39 Bond ImmunizationStrategy to derive a specified rate of return regardless of what happens to market interest rates over holding periodSeeks to offset the opposite changes in bond valuation caused by price effect and reinvestment effectPrice effect:change in bond value caused by interest rate changesReinvestment effect:as coupon payments are received,they are reinvested at higher or lower rates than original coupon rateBond immunization occurs when the average duration of the bond portfolio just equals the investment time horizon.Copyright 2014 Pearson Education,Inc.All rights reserved.11-40 Bond Investment StrategiesConservative ApproachMain focus is high current incomeHigh credit quality bonds are usedUsually longer holding periodsAggressive ApproachMain focus is capital gainsUsually shorter holding periods with frequent bond tradingUse forecasted interest rate strategy to time bond tradingCopyright 2014 Pearson Education,Inc.All rights reserved.11-41 Bond Investment Strategies(contd)Buy-and-hold strategyReplace bonds as they mature or quality declinesBond ladder strategySet up“ladder”by investing equal amounts into varying maturity dates(i.e.3-,5-,7-and 10-year)As bonds mature,purchase new bonds with 10-year maturity to keep ladder growingProvides higher yields of longer-term bonds and dollar-cost averaging benefitsCopyright 2014 Pearson Education,Inc.All rights reserved.11-42 Bond Investment Strategies(contd)Bond SwapsOccur when investor sells one bond and simultaneously buys another bond in its placeYield pickup swap strategySell a lower yielding bond and replace it with a comparable credit quality bond with higher yieldOften done between different bond sectors(i.e.industrial bonds vs.utility bonds)Copyright 2014 Pearson Education,Inc.All rights reserved.11-43 Bond Investment Strategies(contd)Tax swap strategySell a bond that has declined in value,use the capital loss to offset other capital gains,and repurchase another bond of comparable credit qualityWatch out for wash salesnew bond cannot be an identical issue to old bondCopyright 2014 Pearson Education,Inc.All rights reserved.11-44 Chapter 11 ReviewLearning Goals1.Explain the behavior of market interest rates and identify the forces that cause interest rates to change.2.Describe the term structure of interest rates and note how yield curves can be used by investors.3.Understand how bonds are valued in the marketplace.Copyright 2014 Pearson Education,Inc.All rights reserved.11-45 Chapter 11 Review(contd)Learning Goals(contd)4.Describe the various measures of yield and return and explain how these standards of performance are used in bond valuation.5.Understand the basic concept of duration,how it can be measured,and its use in the management of bond portfolios.6.Discuss various bond investment strategies and the different ways these securities can be used by investors.Chapter 11Additional Chapter ArtCopyright 2014 Pearson Education,Inc.All rights reserved.11-47 Figure 11.3A Yield Curves on U.S.Treasury Issues(Source:U.S.Department of the Treasury,July 17,2012.)Copyright 2014 Pearson Education,Inc.All rights reser