Financial Institutions Financial Institutions and Marketsand Markets

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes

Day 3Day 3““How do financial markets work?”How do financial markets work?”

卜安吉卜安吉

Sept. 11, 2012Sept. 11, 2012 Financial Institutions & Markets, ChFinancial Institutions & Markets, Ch. 3. 3

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Chapter 3: Bond Chapter 3: Bond CalculationsCalculations

Bond YieldsBond Yields

Current Yield, p. 51-Current Yield, p. 51-22

Yield on a Discount Yield on a Discount Basis, p. 52-58Basis, p. 52-58

Asked YieldAsked Yield

Covered in class. Covered in class. Money

Sept. 11, 2012Sept. 11, 2012 Financial Institutions & Markets, ChFinancial Institutions & Markets, Ch. 3. 3

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Bond Yield CalculationsBond Yield Calculations

Bond yields are quoted using a variety Bond yields are quoted using a variety of conventions, depending on both of conventions, depending on both the type of issue and the market.the type of issue and the market.

We examine three bond yield We examine three bond yield calculations commonly used for short calculations commonly used for short and long-term debt.and long-term debt.

Again see Chapter 3: pp. 51-58Again see Chapter 3: pp. 51-58

Sept. 11, 2012Sept. 11, 2012 Financial Institutions & Markets, ChFinancial Institutions & Markets, Ch. 3. 3

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Bond Yield Calculations: Bond Yield Calculations: Current YieldCurrent Yield

What is the current yield for a bond with a face What is the current yield for a bond with a face value of $1,000, a current price of $921.01, value of $1,000, a current price of $921.01, and a coupon rate of 10.95%?and a coupon rate of 10.95%?

Answer:Answer:

iicc = = C / P = $109.50 / $921.01 = 11.89%C / P = $109.50 / $921.01 = 11.89%

Notes:Notes: C (coupon payment) = 10.95% x $1,000 C (coupon payment) = 10.95% x $1,000 = $109.50= $109.50

The Asked Price is the buyer’s price!The Asked Price is the buyer’s price!

Sept. 11, 2012Sept. 11, 2012 Financial Institutions & Markets, ChFinancial Institutions & Markets, Ch. 3. 3

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Bond Yield Calculations: Bond Yield Calculations: Yield on a Discount BasisYield on a Discount Basis

What is the discount yield for a one-What is the discount yield for a one-year bond with a face value of $1,000, year bond with a face value of $1,000, and a current price of $875?and a current price of $875?

Answer:Answer:iidb db = = [ (F-P) / F ] x [ 360 / days to maturity][ (F-P) / F ] x [ 360 / days to maturity]

= [ (1000 – 875) / 1000 ] x [360 / 365] = 12.33%= [ (1000 – 875) / 1000 ] x [360 / 365] = 12.33%

Dealer’s Spread = Profit = PDealer’s Spread = Profit = Pasked asked – – PPbidbid

Sept. 11, 2012Sept. 11, 2012 Financial Institutions & Markets, ChFinancial Institutions & Markets, Ch. 3. 3

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Asked Yield, the Bond Calculation Asked Yield, the Bond Calculation from Financial Management Class from Financial Management Class

The Asked Yield is the Yield to The Asked Yield is the Yield to Maturity – if you buy the Bond and Maturity – if you buy the Bond and hold it to maturity, this is the yield hold it to maturity, this is the yield that you will receive.that you will receive.

This is the yield we calculated This is the yield we calculated in Finance, the Introductory in Finance, the Introductory class. The formula may not class. The formula may not include every coupon as you include every coupon as you may buy the bond after it was may buy the bond after it was initially sold, say for example initially sold, say for example in year 3 of a 5 year U.S. in year 3 of a 5 year U.S. Treasury Note.Treasury Note.

TSE – Canada’s main stock/bond exchange