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1、十五AssetValuation:DebtInvestments:AnalysisandValuation1.A:IntroductiontotheValuationofFixedIncomeSecuritiesa:Describethefundamentalprinciplesofbondvaluation.Bondinvestorsarebasicallyentitledtotwodistincttypesofcashflows:1)theperiodicreceiptofcouponincomeoverthelifeofthe
2、bond,and2)therecoveryofprincipal(parvalue)attheendofthebond'slife.Thus,invaluingabond,you'redealingwithanannuityofcouponpayments,plusalargesinglecashflow,asrepresentedbytherecoveryofprincipalatmaturity,orwhenthebondisretired.Thesecashflows,alongwiththerequiredrateofret
3、urnontheinvestment,arethenusedinapresentvaluebasedbondmodeltofindthedollarpriceofabond.b:Explainthethreestepsinthevaluationprocess.Thevalueofanyfinancialassetcanbedeterminedasthesumoftheasset’sdiscountedcashflows.Therearethreesteps:·Estimatethecashflows.·Determinetheap
4、propriatediscountrate.·Calculatethesumofpresentvaluesoftheestimatedcashflows.c:Explainwhatismeantbyabond'scashflow.ThisLOSisverystraightforward.Abond'scashflowisthecouponorprincipalvalue.Foranoption-freebond(meaningthatthebondisnotcallable,putable,convertible,etc.),the
5、expectedcashflowstructureisshownonthetimelinebelow.Wherem=maturity,par,orfacevalue(usually$1,000,￡1,000,etcetera),CPN=(maturityvalue*statedcouponrate)/#couponsperyear,andN=#ofyearstomaturity*#couponsperyear.So,foranarbitrarydiscountratei,thebond’svalueis:Bondvalue=CPN1
6、+CPN2+...+CPNn*m+M(l+i/m)1(1+i/m)2(l+i/m)n*mWhere:i=interestrateperannum(yieldtomaturityorYTM),m=numberofcouponsperyear,andn=numberofyearstomaturity.d:Discussthediffultiesofestimatingtheexpectedcashflowsforsometypesofbondsandidentifythebondsforwhichestimatingtheexpecte
7、dcashflowsisdifficult.Normally,estimatingthecashflowstreamofahigh-qualityoption-freebondisrelativelystraightforward,astheamountandtimingofthecouponsandprincipalpaymentsareknownwithahighdegreeofcertainty.Removethatcertainty,anddifficultieswillariseinestimatingthecashflo
8、wstreamofabond.Asidefromnormalcreditrisks,thefollowingthreeconditionscouldleadtodifficultiesinforecastingthefuturecas
