15 - 1

Bonds

15
& SF

Chapter 15

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Bonds

Learning Objectives

15
& SF

After completing this chapter, you will be able to:

Calculate
LO 1.

the market price of a bond on any date

LO 2.

the yield to maturity of a bond on any

interest payment
date

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15 - 3

Bonds

15
& SF

fixed Income investments

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Bonds

15
& SF

15 - 4

Basic Concepts & Definitions of

MainCharacteristics
Characteristics
Main

Face Value (or denomination)

the principal amount that the issuer is
required to pay to the bond holder on
the maturity date
Coupon

interest rate paid on face value

rate normally fixed for life of bond
paid semiannually

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Bonds

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& SF

15 - 5

Basic Concepts & Definitions of

MainCharacteristics
Characteristics
Main

a bond is basically a loan used to raise funds for the

organization or institution, e.g. CSBs, Municipalities
the issue date is the date on which the loan was made
and on which interest starts to accrue
are fixed Income investments i.e. they have a fixed interest
rate or coupon payable on the principal amount
borrower is required to make periodic payments of interest only

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Bonds

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& SF

15 - 6

Basic Concepts & Definitions of

MainCharacteristics
Characteristics
Main

issued with maturities ranging from 2

on the maturity
the

McGraw-Hill Ryerson

to 30 years

date of the bond,

full principal amount is repaid
along with the final interest payment

15 - 7

Bonds

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& SF

Do Canada Savings Bonds have exactly the

same characteristics as Marketable Bonds?
CanadaSavings
Savings
Canada
Bonds
Bonds

Youcan
cancash
cashin
inaaCSB
CSB
You
beforeits
itsscheduled
scheduled
before
maturitydate
dateand
and
maturity
receivethe
the
receive
fullface
facevalue
value
full
plusaccrued
accrued
plus
interest
interest

McGraw-Hill Ryerson

Marketable
Marketable
Bonds
Bonds

Youcannot
cannotdo
dothis
this
You
withaaM
MBB
with
If you
you want
want to
to cash
cash in
in before
before
If
matures, you
you must
must do
do
itit matures,
this through
through an
an investment
investment
this
dealer in
in the
the bond
bond market
market
dealer

Bonds

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& SF

Effectsof
ofInterest
InterestRate
Rate
Effects
Changeson
onBond
BondPrices
Prices
Changes

IfIfthe
themarket
marketrate
ratefalls
falls
below
belowthe
thecoupon
couponrate,
rate,
the
thebonds
bondsprice
pricerises
rises
above
aboveits
itsface
facevalue
value

15 - 8

Bond
Bond
Price
Price

Coupon
Coupon
Rate
Rate

Market
Market
Rate
Rate

Face
Face
Value
Value

themarket
marketrate
raterises
rises
IfIfthe
Coupon
Coupon
above
the
coupon
rate,
above the coupon rate,
Rate
Rate
thebonds
bondsprice
pricefalls
falls
the
belowits
itsface
facevalue
value
below

Market
Market
Rate
Rate

Face
Face
Value
Value

McGraw-Hill Ryerson

Bond
Bond
Price
Price

Bonds

Effectsof
ofInterest
InterestRate
Rate
Effects
Changeson
onBond
BondPrices
Prices
Changes

15
& SF

Fair Market
Value of a Bond

Formula
Formula

15 - 9

Present Value of the

Interest Payments

Bond Price = b(FV)

1 (1 + i)- n
i

Present Value of
the Face Value

+ FV(1 + i)- n

2b==coupon
couponrate
rate(compounded
(compoundedsemiannually)
semiannually)
2b
FV==Face
FaceValue
Valueof
ofthe
thebond
bond
FV
Example
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15 - 10

Bonds

15

A $5,000 face value bond has a coupon rate

of 6.6% and a maturity date of March 1, 2018.
LO 1.
Interest is paid semi-annually. On September 1,
2002, the prevailing interest rate on long-term bonds abruptly
rose from 6% to 6.2% compounded semi-annually.
What were the bond's prices before and after the interest rate
FV = 5000change?
b = 6.6%/2
& SF

September 1, 2002 = interest payment date

15.5 years remain until maturity

15.5 ** 22 == 31
31
nn == 15.5
The semi-annual
semi-annual interest
interest paid
paid on
on the
the bond
bond isis
The
b(FV) == 0.033
0.033 ($5,000)
($5,000) == $165
$165
b(FV)

Calculation
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15 - 11

Bonds

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$5,000face
facevalue
value
AA$5,000
bondhas
hasaacoupon
couponrate
rate
bond
6.6%and
andaa
ofof6.6%
maturitydate
dateofofMarch
March
maturity
2018.
1,1,2018.
Interestisis
Interest
paidsemi-annually.
semi-annually.On
On
paid
September1,1,2002,
2002,the
the
September
prevailinginterest
interestrate
rate
prevailing
onlong-term
long-termbonds
bonds
on
abruptly
abruptly
rosefrom
from6%
6%toto6.2%
6.2%
rose
compoundedsemisemicompounded
annually.What
Whatwere
werethe
the
annually.
bond'sprices
pricesbefore
beforeand
and
bond's
afterthe
theinterest
interestrate
rate
after
change?

McGraw-Hill Ryerson

Calculate the bond price before

the market rate increase.
PV =

-5300.01

165

31

5000

$5,300.01isisthe
thebond
bondprice
price
$5,300.01
beforethe
therate
rateincrease
increase
before

15 - 12

Bonds

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$5,000face
facevalue
value
AA$5,000
bondhas
hasaacoupon
couponrate
rate
bond
6.6%and
andaa
ofof6.6%
maturitydate
dateofofMarch
March
maturity
2018.
1,1,2018.
Interestisis
Interest
paidsemi-annually.
semi-annually.On
On
paid
September1,1,2002,
2002,the
the
September
prevailinginterest
interestrate
rate
prevailing
onlong-term
long-termbonds
bonds
on
abruptly
abruptly
rosefrom
from6%
6%toto6.2%
6.2%
rose
compoundedsemisemicompounded
annually.What
Whatwere
werethe
the
annually.
bond'sprices
pricesbefore
beforeand
and
bond's
afterthe
theinterest
interestrate
rate
after
change?

McGraw-Hill Ryerson

Calculate the bond price after

the market rate increase.
PV =

-5197.38

6.2
$5,197.38 is
is the
the bond
bond price
price
$5,197.38
after the
the rate
rate
after
increase
increase
Bond price decreased by

$5,300.01 5,197.38
$128.51
== $128.51

Bonds

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& SF

LO 2.

Calculatingthe
the
Calculating
Yield-tto-Maturity
o-Maturityof
ofaa
YieldBond
Bond

The bonds yield-to-maturity is the

discount rate that makes the
combined

PV of all remaining interest payments

and the Face Value
equal to
the bonds Market Value

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15 - 13

Bonds

Calculatingthe
theYieldYield-tto-Maturity
o-Maturity
Calculating
ofaaBond
Bond
of

15
& SF

15 - 14

A $1,000 face value Province of Manitoba bond, bearing

interest at 5.8% payable semiannually, has 11 years
remaining until maturity. What is the bonds yield to
maturity (YTM) at its current market price of $972?
I/Y
P/Y ==
2

22
972

6.1542

PMT==
PMT
1000*5.8%/2
1000*5.8%/2

29
1000

Thebonds
bondsYTM
YTMisis6.154%
6.154%
The
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Bonds

PricingaaBond
Bond
Pricing
between
between
InterestPayment
PaymentDates
Dates
Interest

15
& SF

A $1,000, 20 year, 6% coupon bond was issued on

August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Calculatethe
thePV
PVof
ofthe
theremaining
remaining
Calculate
paymentson
onthe
thepreceding
precedinginterest
interest
payments
paymentdate.
date.
payment
Calculatethe
theFV
FVof
ofthe
theStep
Step11result
resulton
on
Calculate
thedate
dateof
ofsale.
sale.
the
McGraw-Hill Ryerson

15 - 15

Bonds

PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15
& SF

15 - 16

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Most
Most
recent
recent
interest
interest
payment
payment
date is
is
date
August 15,
15,
August
2002
2002
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P/V ==
P/Y

-947.40
2

36

30

6.5

1000

PMT==
PMT
1000*6.0%/2
1000*6.0%/2

OnAugust
August15,
15,2002,
2002,the
thebonds
bondsvalue
valueisis
On
$947.40
$947.40

Bonds

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PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15 - 17

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?
P/V
P/Y ==

-947.402

Calculate the FV of $947.40 on Nov.3, 2002

Weneed
needto
tofind:
find:
We
a)##of
ofdays
daysbetween
betweeninterest
interestpayment
paymentdates,
dates, and
and
a)
b)##of
ofdays
daysfrom
fromAug.15
Aug.15totoNov.3
Nov.3
b)
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Bonds

15
& SF

Using

15 - 18

Texas Instruments
BAII PLUS
2nd
Date 08.1502

Calculate
the time from
Aug.
15th to Nov. 3rd
DBD = 80

2nd
Date

Enter
11.0302
Enter

02.1503
Enter

CPT

CPT

the time from

Aug. 15th,2002 to
Feb. 15th,2003
DBD = 184
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Days Between
Between Dates
Dates
Days

Bonds

15
& SF

PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15 - 19

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

FV=
P/Y =
.4348

960.67
.43482

N == 80/184
80/184
N

947.40

Thebond
bondsold
soldfor
for$960.67
$960.67on
onNov.3,
Nov.3,2002
2002
The
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15 - 20

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Click here:
here: http://www.finpipe.com/fixed.htm
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Thissite
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completedetails
detailson
onhow
howbonds
bondsfunction.
function.
This
Justclick
clickon
onthe
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information.
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Bonds

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15 - 21

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This completes Chapter 15

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