Unformatted text preview:

CHAPTER TWENTY-ONECAPITALIZATION OF INCOME METHODSlide 3Slide 4Slide 5BOND ATTRIBUTESLENGTH OF TIME TO MATURITYTAX STRUCTURESlide 9MARKETABILITYSlide 11Slide 12LIKELIHOOD OF DEFAULTSlide 14Slide 15Slide 161CHAPTER TWENTY-ONEBOND ANALYSIS2CAPITALIZATION OF INCOME METHOD•PROMISED YIELD-TO-MATURITY–In equation formwhere P=the current market price of bondn=the number of years to maturityCt=the annual coupon paymenty=the prevailing yield to maturityntttycP1)1(3CAPITALIZATION OF INCOME METHOD•INTRINSIC VALUE–In equation formntttycV1)1(4CAPITALIZATION OF INCOME METHOD•SOLVING FOR V, –Given the current market price (P), the investment decision is•if V is the intrinsic value andV>P buy the bondV<P don’t buy5CAPITALIZATION OF INCOME METHOD•ALTERNATIVELY–SOLVING FOR y* y*>y bond overprice y*<y bond underpriced6BOND ATTRIBUTES•SIX ATTRIBUTES that affect a bond’s value–LENGTH OF TIME TO MATURITY–COUPON RATE–CALL PROVISIONS–TAX STATUS–MARKETABILITY–LIKELIHOOD OF DEFAULT7LENGTH OF TIME TO MATURITY•COUPON RATE AND LENGTH TO MATURITY–these attributes determine size and timing of cash flow–yield-to-maturity8TAX STRUCTURE•TAX STRUCTURE–Taxation affects bond prices and yields•low-coupon bonds selling at a discount provide return in–coupon payments–gains from price appreciations•taxes on appreciations may be deferred until bond sale or maturity•discount bonds have a tax advantage9TAX STRUCTURE•TAX STRUCTURE–Taxation affects bond prices and yields•because of tax effect, discount bonds should have a slightly lower before-tax yield•low-coupon bonds will have a slightly higher intrinsic value10MARKETABILITY•MARKETABILITY–refers to the ability of the investor to resell11MARKETABILITY•MARKETABILITY –bid-ask spread is one indicator of marketability•the higher the spread, the less marketable•the lower the spread, the more marketable–bonds that are actively traded should have a lower YTM and a higher V12MARKETABILITY•MARKETABILITY–bonds that are actively traded should have a lower YTM and a higher V13LIKELIHOOD OF DEFAULT•LIKELILHOOD OF DEFAULT–Bond ratings provided by professional services.14LIKELIHOOD OF DEFAULT•LIKELILHOOD OF DEFAULT–Two most famous include•Moody’s Investors Services, Inc.•Standard & Poor’s Corporate ratings15LIKELIHOOD OF DEFAULT•LIKELIHOOD OF DEFAULT–Categories•investment grade usually the bonds in the top four ratings•speculative•often called junk bonds16LIKELIHOOD OF DEFAULT•LIKELIHOOD OF DEFAULT–Bond ratings provided by professional services.•better ratings are generally associated with–larger financial leverage–larger firm size–larger and steadier profits–large cash flows–lack of subordination to other debt


View Full Document

CSULB FIN 650 - 21-BondAnalysis

Download 21-BondAnalysis
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view 21-BondAnalysis and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view 21-BondAnalysis 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?