Scribd Logo
Upload

Welcome to Scribd!

  • 83 views

    Presentation1.Ppt Ass - PPT 222

    Uploaded by

    kegnata
    A bond with a face value of $1000, coupon rate of 10%, and maturity of 25 years currently has a yield to maturity of 12%. The document calculates the future price of this bond after 5 years if the expected market yield declines to 8%. Using the formula, the future price is calculated to be $1,197.94. Realized compound yield is the actual rate of return earned on a bond taking into account the reinvestment of coupon payments over time. An example calculates the realized compound yield of 4% for a bond with a purchase price of $1000, coupon of $80, maturity of 4 years by reinvesting coupons at 8% annually. Yield adjustments are needed for tax

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Presentation1.Ppt Ass - PPT 222

    Uploaded by

    kegnata
    83 views8 pages
    A bond with a face value of $1000, coupon rate of 10%, and maturity of 25 years currently has a yield to maturity of 12%. The document calculates the future price of this bond after 5 years if the expected market yield declines to 8%. Using the formula, the future price is calculated to be $1,197.94. Realized compound yield is the actual rate of return earned on a bond taking into account the reinvestment of coupon payments over time. An example calculates the realized compound yield of 4% for a bond with a purchase price of $1000, coupon of $80, maturity of 4 years by reinvesting coupons at 8% annually. Yield adjustments are needed for tax

    Original Title

    Presentation1.Ppt Ass.ppt 222

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    A bond with a face value of $1000, coupon rate of 10%, and maturity of 25 years currently has a yield to maturity of 12%. The document calculates the future price of this bond after 5 years if the expected market yield declines to 8%. Using the formula, the future price is calculated to be $1,197.94. Realized compound yield is the actual rate of return earned on a bond taking into account the reinvestment of coupon payments over time. An example calculates the realized compound yield of 4% for a bond with a purchase price of $1000, coupon of $80, maturity of 4 years by reinvesting coupons at 8% annually. Yield adjustments are needed for tax

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    83 views8 pages

    Presentation1.Ppt Ass - PPT 222

    Uploaded by

    kegnata
    A bond with a face value of $1000, coupon rate of 10%, and maturity of 25 years currently has a yield to maturity of 12%. The document calculates the future price of this bond after 5 years if the expected market yield declines to 8%. Using the formula, the future price is calculated to be $1,197.94. Realized compound yield is the actual rate of return earned on a bond taking into account the reinvestment of coupon payments over time. An example calculates the realized compound yield of 4% for a bond with a purchase price of $1000, coupon of $80, maturity of 4 years by reinvesting coupons at 8% annually. Yield adjustments are needed for tax

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 8

    Calculating Future Bond Prices

    Calculating Future Bond Prices


    Realized Compound Yield
    Yield Adjustments for Tax-Exempt Bonds

    Calculating Future Bond Prices
    Where:
    P
    f
    = estimated future price of the bond
    C
    i
    = annual coupon payment
    n = number of years to maturity
    hp = holding period of the bond in years
    i = expected semiannual rate at the end of the holding
    period
    hp n
    p
    hp n
    t
    t
    i
    f
    i
    P
    i
    C
    P
    2 2
    2 2
    1
    ) 2 1 ( ) 2 1 (
    2 /

    =
    +
    +
    +
    =


    Calculate the future price of the bond

    Calculate the future price of the bond
    rate 10%, t =25 bond with promised YTM = 12%, face value
    $1000
    Assume expected market YTM decline to 8% after 5 years
    future price after 5 years to estimate the expected YTM
    Pf = ?
    20 years, and the market YTM of 8 %.
    n-2hp = 20 years or
    2n-2hp = 40 periods


    future price of the bond = $1,197.94
















    Future price of the bond












    Realized Compound Yield

    Rate of return actually earned on a bond given
    the reinvestment of the coupons at constant rate
    The return that is actually earned over a given
    time period.


    0 . 1
    bond of price Purchase
    dollars future Total
    RCY
    2 / 1

    =
    n
    Realized Compound Yield
    Assume: F = 1000 C = $80 t=4 years
    reinvestment of the annual 8% coupon (=$80 per
    annum).
    Assuming we reinvest these coupons at 8%, we have the
    following cash flows on the bond:





    = .08
    0 . 1
    $1000
    $1360.49
    RCY
    4 / 1

    =
    Realized Compound Yield

    RCY = .08
    If the reinvestment coupons >8% we will accumulate
    >$1360.49(ending value)
    and earn an annual return > .08
    and if < 8%
    accumulate <$1360.49 and
    earn an annual return(RCY) < .08.
    Yield Adjustments for Tax-Exempt Bonds
    Yield Adjustments for Tax-Exempt Bonds
    Municipal bonds, Treasury issues, and any other
    governmental bonds: Their interest income is partially or
    fully tax-exempt
    For fully tax-exempt bonds



    where: FTEY = fully taxable yield equivalent
    i = the promised yield on the tax exempt bond
    T = the amount and type of tax exemption
    T - 1
    i
    FTEY =
    Example
    A taxable bond has a yield of 8% and a municipal bond
    has a yield of 6%

    If the investor is in a 40% tax bracket, which bond do the investor
    prefer?



    8%(1 - .4) = 4.8%
    The after-tax return on the corporate bond is 4.8%, compared to a 6%
    return on the municipal
    T - 1
    i
    FTEY =

    You might also like