Notes

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The lower the callable price of a callable bond, the more valuable the call provision is to the firm (because they can repurchase at a lower price) therefore the yield to maturity will be higher

Yield to call is calculated by equating the price (found using n as number of periods until maturity) to the annuity of interest payments and callable face value for n= number of periods for callable period

The impact of different bond characteristics

Issue size: If you want to sell your bond you want to make sure there's someone there to buy it. Therefore liquidity is important. A company with many more investors is more attractive because it means it's more liquid

Collateral: If collateral description is first mortgage it means that if the company defaults the bondholder can say they have to sell the asset to pay them back. If it is 'general debenture' it means if the company is bankrupt there's not much value to another piece of debt. First mortgage is more a more secure alternative of insuring debt.

If there is a sinking fund say starting in 5 years it means that from year 5 the company will start to buy back parts of the bond. Usually with the sinking fund, the price paid is less of face value and current market price which is not attractive. it is similar to the bond being callable.

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The price range would be greater for a 9% coupon bond compared to a floating-rate note because the coupons for a floating-rate note will be adjusted with changes in the market rate. Therefore price changes will not be as drastic as a fixed coupon bond which will need to adjust it's price to compensate for changes in the market rate level

if we want to find the quotedprice of a bond whose value is 1056.01 we go

105.601=.601+105

.601=x/32

x=19

Types of corporate bonds:

Callable bonds can be repurchased by the issuer before the maturity date

Puttable bonds gives the bond holder the option to retire or extend the bond

Convertible bonds can be exchanged for ordinary shares

Floating rate bonds have an adjustable coupon rate

Zero coupon bonds do not pay coupons

International bonds

Asset-backed bonds

Indexed/structured bonds

If the bond is called, the bondholder will only receive the call price and not the market price.

spot rates: interest rate for sme given period that starts today

forward rates: interest rate for some given period that starts any time including today

short rates: future short term interest rates that MIGHT happen in the future

The Expectations Hypothesis states ft

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