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【正文】 PMT FV ( ) ( ) ( ) V INT k M k B d N d N = 1 1 1 ... + INT 1 + k d ( ) ( ) ( ) 887 90 1 1 000 1 1 10 10 = k k d d + 90 1 + k d , Find kd + + + + + + + + INPUTS OUTPUT ... 8 19 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. What is reinvestment rate risk? The risk that CFs will have to be reinvested in the future at lower rates, reducing ine. Illustration: Suppose you just won $500,000 playing the lottery. You’ll invest the money and live off the interest. You buy a 1year bond with a YTM of 10%. 8 27 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. If $1,000 is the proper price for the semiannual bond, what is the proper price for the annual payment bond? ?Semiannual bond has kNom = 10%, with EFF% = %. Should earn same EFF% on annual payment bond, so: 10 100 1000 N I/YR PV PMT FV INPUTS OUTPUT 8 35 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. What factors affect default risk and bond ratings? ?Financial performance ?Debt ratio ?TIE, FCC ratios ?Current ratios 8 43 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. ?In a liquidation, unsecured creditors generally get zero. This makes them more willing to participate in reanization even though their claims are greatly scaled back. ?Various groups of creditors vote on the reanization plan. If both the majority of the creditors and the judge approve, pany “emerges” from bankruptcy with lower debts, reduced interest charges, and a chance for success. 8 51 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. Bankruptcy ?Two main chapters of Federal Bankruptcy Act: ?Chapter 11, Reanization ?Chapter 7, Liquidation ?Typically, pany wants Chapter 11, creditors may prefer Chapter 7. 8 47 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. If you bought bonds, would you be more likely to earn YTM or YTC? ?Coupon rate = 10% vs. YTC = kd = %. Could raise money by selling new bonds which pay %. ?Could thus replace bonds that pay $100/year with bonds that pay only $?Investors should expect a call, hence YTC = %, not YTM = 8%. 8 39 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. True or False: “All 10year bonds have the same price and reinvestment rate risk.” False! Low coupon bonds have less reinvestment rate risk but more price risk than high coupon bonds. 8 31 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. Current yield = = = %. Find current yield and capital gains yield for a 9%, 10year bond when the bond sells for $887 and YTM = %. $90 $887 8 23 Copyright 169。 2023 by Harcourt, Inc. All rights reserved. M Bond Value ($) Years remaining to Maturity 1,372 1,211 1,000 83
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