Chapter 06: Interest Rates and Bond Valuation

FORMULAS

Treasury Bills
 (r) = r ⃰ + Inflation Premium

Where: (r) = nominal rate

r ⃰ = real interest rate
r ⃰ + IP = risk-free rate

Corporate Issue Bonds

 (r) = r ⃰ + IP + Risk Premium

Risk Premium includes DEFAULT RP,

LIQUIDITY RP, and MATURITY RP

Treasury Bonds
 (r) = r ⃰ + IP + Maturity Risk Premium

Pure Expectations Theory

Year 1 – 6%
Year 2 – 6.2%
Year 3 – 6.3%

1. 1 yr security, 1 yr from now

(1 + 0.06) x (1+x) = 1.063²
USE CALCU TO SOLVE THE ALGEBRA

BOND VALUATION

Par Value−Present Value

CP+
n
YTM =
( Par Value x 40 % )+( Present Value x 60 %)

Chapter 8: Risk and Returns

 Single Stock (Per Period Basis)
Stock Price End−Stock Price Beg+ Cash Flows
Return=
Price Beggining
Risk = Standard Deviation
Coefficient of Variation = SD / RETURN

 Portfolio (Expected Return of Portfolio