1

Debt Valuation

Topic #2

2

Context

Complete Markets Bonds

Time Value of Money Bond Valuation

Equity Derivatives Real Estate

3

Context

Complete Markets Bonds

Time Value of Money Bond Valuation

Equity Derivatives Real Estate

4

Moving cash in time

Compare cash only at the same point in time Future Value

Compounding Present Value

Discounting NPV

5

Special Cases

Perpetuity

Annuity

Growing Perpetuity

6

Excel functions

PV FV PMT RATE

7

Context

Complete Markets Bonds

Time Value of Money Bond Valuation

Equity Derivatives Real Estate

8

Bond Terminology

Maturity date Term Face value Coupons and coupon payments Zero-coupon bond Yield to Maturity

Risk-free interest rate Spot rates

Yield curve

9

Bond Valuation

Yield to Maturity of a Coupon Bond Price given YTM Time and bond prices Interest rate changes and bond prices

Interest rate sensitivity of bond prices Duration

10

11

Yield Curve and Bond Arbitrage

Zero coupon bonds prices

12

Yield Curve and Bond Arbitrage

Zero coupon bonds yields

13

Corporate Bonds

Credit risk YTM Risk premium Bond ratings

Credit spread

14

Rating is a very precise business