1 / 35

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning. Session 13 Bond Calculations – TEY, CY, YTC, YTM, PV, and Conversion Value. Session Details. Current Value. The current value of a bond the present value of the cash flows

afra
Download Presentation

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning Session 13Bond Calculations – TEY, CY, YTC, YTM, PV, and Conversion Value

  2. Session Details

  3. Current Value The current value of a bond • the present value of the cash flows • discounted back to the present • at the going rate of interest on comparable debt

  4. Bond at Par Value $1,000 7%

  5. Bond at Discount 8% $950

  6. Bond at Premium $1,050 6%

  7. Calculations Taxable-Equivalent Yield Brad Feathers is in the 33% marginal income tax bracket and is considering investing in a municipal bond with a yield of 4.2%. He is also considering Treasury bonds with the same maturity that have a yield of 5.5%. Which should he purchase?

  8. TEY Both Federal and State Income Tax and Taxpayer Itemizes If a municipal bond is free from both federal and state income taxation, and the taxpayer itemizes deductions, then the formula is:

  9. Double Tax-Exempt Calculation Brad Feathers, who itemizes deductions, is in the 33% federal MTB, and the 10% state MTB and is considering a bond issued by his state with a yield of 4.2%. What is the TEY? Answer: 6.97%

  10. Bond Calculations For bond calculations, make the following assumptions unless the problem specifically states otherwise: • Face value of $1,000 • Semiannual compounding (even zeros) • Coupon interest needs to be converted into a semi-annual payment, and entered as a payment • Number of compounding periods: 2 per year • End mode • Always reserve the I/YR function (“i” on 12C) for current interest rates (YTM) • PV is a negative number, FV is a positive number, coupon payments (PMT) are a positive number

  11. Calculations: Current Yield Current Yield is simply: Example: Bond A has a coupon rate of 7%, and is currently trading at 980, what is the current yield? 70/980 = .0714 = 7.14%

  12. Calculations: YTM and YTC James has just purchased a bond for $950. The coupon rate is 7.5%, and the bond matures in 20 years. It is callable at $1,020 in 8 years. What is the YTM and YTC of James’ bond? Set calculator for 2 P/YR YTM YTC PMT 37.5037.50 PV (950)(950) FV 1000 1020 N 20, gold, N (40) 8, gold, N (16) i = 8.01% i = 8.56%

  13. Yield-to-Call

  14. Calculations: Present Value Jenny Vegas owns a AAA-rated bond with a face value of $1,000 and a coupon rate of 7%, and interest is paid semiannually. The bond matures in nine years. Similar bonds have a YTM of 12%. What is the current price of the bond? Set calculator for 2 P/YR FV = 1000 PMT = 35 I = 12 N = 9 (SHIFT, n) PV = 729.31

  15. Calculations: Present Value Beth Reno owns a AAA-rated, zero coupon municipal bond with a face value of $1,000. The bond matures in 23 years. Comparable bonds with the same maturity are yielding 9.5%. What is the current price of the bond? Set calculator for 2 P/YR FV = 1000 i = 9.5 N = 23 (SHIFT, n) PV = 118.28

  16. Fluctuations in Bond Prices Prices of bonds • with lower coupons fluctuate more (higher duration) • with higher coupons fluctuate less (lower duration) • with longer terms to maturity fluctuate more (higher duration) • with shorter terms to maturity fluctuate less (lower duration)

  17. Yield “Seesaw” CY YTM YTC CY = current yield YTM = yield-to-maturity YTC = yield-to-call

  18. Yield “Seesaw” Premium Bond CY YTM YTC CY = current yield YTM = yield-to-maturity YTC = yield-to-call

  19. Yield “Seesaw” Discount Bond CY = current yield YTM = yield-to-maturity YTC = yield-to-call YTC YTM CY

  20. Convertible Bond Conversion Value

  21. Conversion Value Calculation Example: Convertible bond is currently trading for $925, and has a conversion price of $40 per share. The current price of the underlying stock is $35, what is the conversion value? Conversion ratio: 1,000/$40 = 25 shares 25 shares x $35 = $875 conversion value Bond Investment Value: Values the convertible bond as a straight bond based on current interest rates

  22. Convertible Bond Sample Calculations Kathleen Sullivan purchased a convertible bond of GetGo Corporation a few years ago. The bond has an 8½% coupon rate and the bond matures in 6 years. Comparable debt currently yields 9½%, and the bond is convertible at $29 per share. The current price of GetGo common stock is $32, and the current price of the convertible bond is $1,226. • Solve for the conversion value of the bond • Solve for the investment value of the bond • Solve for the downside risk of the bond

  23. Conversion Value Solution Conversion formula

  24. Investment Value Calculation Calculate value as a bond, based on current interest rates Set for 2 P/YR N = 6, SHIFT N (12 periods) I = 9.5 PMT = 42.50 FV = 1000 PV = $955.05

  25. Downside Risk • The downside risk is the difference between the current market price of the convertible bond and the investment value of the bond. • $1,226 current market price – $955.05 investment value = $270.95 • Note that you do not use the conversion value, even when it is higher than the investment value, which it is in this case ($1,103.45). • Investment value will change (and so will downside risk) as interest rates change.

  26. Convertible Bond Relationships Bond Price ($) Market price Conversion value line Investment value of bond Stock Price ($)

  27. Question 1 Which of the following relationships are true for a bond selling at a premium or a discount? • When selling at a premium, yield-to-call is higher than yield-to-maturity. • When selling at a premium, current yield is higher than yield-to-call. • When selling at a discount, yield-to-call is higher than yield-to-maturity. • When selling at a discount, current yield is higher than yield-to-call. • I and II only • I and IV only • II and III only • II and IV only • III and IV only

  28. Question 2 Rex owns a corporate bond that currently sells for $1,090. The coupon rate is 9%, and the bond matures in 23 years. The bond is callable in 8 years at $1,020. What is the yield-to-call of this bond? • 6.84% • 7.66% • 7.93% • 8.13%

  29. Question 3 Regina owns a zero coupon bond with face value of $1,000. It has a yield-to-maturity of 7.5%, and 13 years until maturity. What is the intrinsic value of this bond? • $383.98 • $387.66 • $390.56 • $393.72

  30. Question 4 Ken Kline is in the 33% marginal income tax bracket. He owns a corporate bond that pays $35 in interest semiannually. What yield on municipal bonds would be comparable to the after-tax yield Ken is currently receiving? • 2.35% • 4.69% • 4.97% • 5.22%

  31. Question 5 What is the intrinsic value of a 19-year, 7% coupon bond selling in a market that has a required return of 8%? • $567.84 • $877.42 • $898.12 • $903.16

  32. Question 6 Dawn has just purchased a bond for $960. It matures in 20 years, has a coupon rate of 9.5%, and pays interest semiannually. What is the internal rate of return (yield-to-maturity) of the bond? • 9.97% • 10.15% • 10.48% • 10.67%

  33. Question 7 James owns V-Corp bonds (A-rated) that mature in 9 years, pay semiannual interest, and have a coupon of 9%. Similar bonds (A-rated with 9 years to maturity) yield 8%. The V-Corp bonds are convertible into common stock at $18 per share, and the current market price of V-Corp is $17. What is the conversion value of the V-Corp bond? • $944.44 • $977.62 • $1,000.00 • $1,063.30

  34. Question 8 John owns a convertible bond that has a conversion price of $25 per share and a coupon of 6%. Interest is paid semiannually. The current market price of the stock is $26 per share. The investment value of the bond is $970, and the bond is currently trading at $1,150. What is the downside risk of the bond? • $110 • $140 • $160 • $180

  35. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning Session 13End of Slides

More Related