\documentclass[10pt,a4paper]{article} % Packages \usepackage{fancyhdr} % For header and footer \usepackage{multicol} % Allows multicols in tables \usepackage{tabularx} % Intelligent column widths \usepackage{tabulary} % Used in header and footer \usepackage{hhline} % Border under tables \usepackage{graphicx} % For images \usepackage{xcolor} % For hex colours %\usepackage[utf8x]{inputenc} % For unicode character support \usepackage[T1]{fontenc} % Without this we get weird character replacements \usepackage{colortbl} % For coloured tables \usepackage{setspace} % For line height \usepackage{lastpage} % Needed for total page number \usepackage{seqsplit} % Splits long words. %\usepackage{opensans} % Can't make this work so far. Shame. Would be lovely. \usepackage[normalem]{ulem} % For underlining links % Most of the following are not required for the majority % of cheat sheets but are needed for some symbol support. \usepackage{amsmath} % Symbols \usepackage{MnSymbol} % Symbols \usepackage{wasysym} % Symbols %\usepackage[english,german,french,spanish,italian]{babel} % Languages % Document Info \author{Natalie Moore (NatalieMoore)} \pdfinfo{ /Title (valuing-bonds.pdf) /Creator (Cheatography) /Author (Natalie Moore (NatalieMoore)) /Subject (Valuing bonds Cheat Sheet) } % Lengths and widths \addtolength{\textwidth}{6cm} \addtolength{\textheight}{-1cm} \addtolength{\hoffset}{-3cm} \addtolength{\voffset}{-2cm} \setlength{\tabcolsep}{0.2cm} % Space between columns \setlength{\headsep}{-12pt} % Reduce space between header and content \setlength{\headheight}{85pt} % If less, LaTeX automatically increases it \renewcommand{\footrulewidth}{0pt} % Remove footer line \renewcommand{\headrulewidth}{0pt} % Remove header line \renewcommand{\seqinsert}{\ifmmode\allowbreak\else\-\fi} % Hyphens in seqsplit % This two commands together give roughly % the right line height in the tables \renewcommand{\arraystretch}{1.3} \onehalfspacing % Commands \newcommand{\SetRowColor}[1]{\noalign{\gdef\RowColorName{#1}}\rowcolor{\RowColorName}} % Shortcut for row colour \newcommand{\mymulticolumn}[3]{\multicolumn{#1}{>{\columncolor{\RowColorName}}#2}{#3}} % For coloured multi-cols \newcolumntype{x}[1]{>{\raggedright}p{#1}} % New column types for ragged-right paragraph columns \newcommand{\tn}{\tabularnewline} % Required as custom column type in use % Font and Colours \definecolor{HeadBackground}{HTML}{333333} \definecolor{FootBackground}{HTML}{666666} \definecolor{TextColor}{HTML}{333333} \definecolor{DarkBackground}{HTML}{399EBD} \definecolor{LightBackground}{HTML}{F2F8FA} \renewcommand{\familydefault}{\sfdefault} \color{TextColor} % Header and Footer \pagestyle{fancy} \fancyhead{} % Set header to blank \fancyfoot{} % Set footer to blank \fancyhead[L]{ \noindent \begin{multicols}{3} \begin{tabulary}{5.8cm}{C} \SetRowColor{DarkBackground} \vspace{-7pt} {\parbox{\dimexpr\textwidth-2\fboxsep\relax}{\noindent \hspace*{-6pt}\includegraphics[width=5.8cm]{/web/www.cheatography.com/public/images/cheatography_logo.pdf}} } \end{tabulary} \columnbreak \begin{tabulary}{11cm}{L} \vspace{-2pt}\large{\bf{\textcolor{DarkBackground}{\textrm{Valuing bonds Cheat Sheet}}}} \\ \normalsize{by \textcolor{DarkBackground}{Natalie Moore (NatalieMoore)} via \textcolor{DarkBackground}{\uline{cheatography.com/19119/cs/8225/}}} \end{tabulary} \end{multicols}} \fancyfoot[L]{ \footnotesize \noindent \begin{multicols}{3} \begin{tabulary}{5.8cm}{LL} \SetRowColor{FootBackground} \mymulticolumn{2}{p{5.377cm}}{\bf\textcolor{white}{Cheatographer}} \\ \vspace{-2pt}Natalie Moore (NatalieMoore) \\ \uline{cheatography.com/nataliemoore} \\ \uline{\seqsplit{www}.clipto.com/transcribe-audio-video-to-text-free?via=natalie} \end{tabulary} \vfill \columnbreak \begin{tabulary}{5.8cm}{L} \SetRowColor{FootBackground} \mymulticolumn{1}{p{5.377cm}}{\bf\textcolor{white}{Cheat Sheet}} \\ \vspace{-2pt}Published 19th March, 2017.\\ Updated 19th March, 2017.\\ Page {\thepage} of \pageref{LastPage}. \end{tabulary} \vfill \columnbreak \begin{tabulary}{5.8cm}{L} \SetRowColor{FootBackground} \mymulticolumn{1}{p{5.377cm}}{\bf\textcolor{white}{Sponsor}} \\ \SetRowColor{white} \vspace{-5pt} %\includegraphics[width=48px,height=48px]{dave.jpeg} Measure your website readability!\\ www.readability-score.com \end{tabulary} \end{multicols}} \begin{document} \raggedright \raggedcolumns % Set font size to small. Switch to any value % from this page to resize cheat sheet text: % www.emerson.emory.edu/services/latex/latex_169.html \footnotesize % Small font. \begin{multicols*}{3} \begin{tabularx}{5.377cm}{p{0.4977 cm} x{4.4793 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Formula key}} \tn % Row 0 \SetRowColor{LightBackground} Po & = Asset's price today (at time 0) \tn % Row Count 1 (+ 1) % Row 1 \SetRowColor{white} CFn & = Cash flow expected at time t \tn % Row Count 2 (+ 1) % Row 2 \SetRowColor{LightBackground} t & = time \tn % Row Count 3 (+ 1) % Row 3 \SetRowColor{white} r & = required return. Discount rate that reflects the asset's risk. \tn % Row Count 5 (+ 2) % Row 4 \SetRowColor{LightBackground} n & = Assets life / period it distributes cash flows \tn % Row Count 7 (+ 2) % Row 5 \SetRowColor{white} \$C & = Coupon payment amount \tn % Row Count 8 (+ 1) % Row 6 \SetRowColor{LightBackground} \$M & = par value maturity amount \tn % Row Count 9 (+ 1) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} p{0.4977 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Required rate of return}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{The rate of return that investors expect or require an investment to earn given its risk.} \tn % Row Count 2 (+ 2) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Riskier = higher the return required by investors in the marketplace} \tn % Row Count 4 (+ 2) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Purchase of investment means investor loses the opportunity to invest their money in another asset. Opportunity cost.} \tn % Row Count 7 (+ 3) \hhline{>{\arrayrulecolor{DarkBackground}}--} \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Po = CF1/(1 + r)\textasciicircum{}1\textasciicircum{} + CF2/(1 + r)\textasciicircum{}2\textasciicircum{} + ... + CFn/(1 + r)\textasciicircum{}n\textasciicircum{}}}} \tn \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.74655 cm} x{4.23045 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Asset valuation basics}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{In a market economy, ownership of an asset confers rights to stream of benefits generated by asset.} \tn % Row Count 2 (+ 2) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Benefits may be tangible, such as interest payments on bonds, or intangible, e.g. viewing a beautiful ring} \tn % Row Count 5 (+ 3) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Asset value}} = present value of all its future benefits} \tn % Row Count 7 (+ 2) % Row 3 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Finance theory focuses on tangible benefits, usually cash flows an asset pays over time} \tn % Row Count 9 (+ 2) % Row 4 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{e.g. landlord. Incoming = Rental payments from tenants. Outgoing = Liabilities for maintaining premises, paying taxes, etc.} \tn % Row Count 12 (+ 3) % Row 5 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{When selling an asset the market price should equal present value of all future net cash flows} \tn % Row Count 14 (+ 2) % Row 6 \SetRowColor{LightBackground} Step 1: & Estimate \$\$ an investment distributes over time \tn % Row Count 16 (+ 2) % Row 7 \SetRowColor{white} Step 2: & Discount expected cash payments using time value of money maths \tn % Row Count 18 (+ 2) % Row 8 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Therefore pricing an asset requires knowledge of} \tn % Row Count 19 (+ 1) % Row 9 \SetRowColor{white} - & its future benefits \tn % Row Count 20 (+ 1) % Row 10 \SetRowColor{LightBackground} - & the appropriate discount rate to convert future benefits into a present value \tn % Row Count 23 (+ 3) % Row 11 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{{\bf{Certainty}}} \tn % Row Count 24 (+ 1) % Row 12 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{If an assets future benefits are uncertain then investors will apply a larger rate when discounting those benefits to present value} \tn % Row Count 27 (+ 3) % Row 13 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{An inverse relationship exists between risk and value} \tn % Row Count 29 (+ 2) % Row 14 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Investors will pay a higher price for investment with more credible promise.} \tn % Row Count 31 (+ 2) \end{tabularx} \par\addvspace{1.3em} \vfill \columnbreak \begin{tabularx}{5.377cm}{p{0.74655 cm} x{4.23045 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Asset valuation basics (cont)}} \tn % Row 15 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Riskier investments must offer higher returns} \tn % Row Count 1 (+ 1) % Row 16 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{{\bf{Marginal benefit of owning an asset}} = right to receive cash flows it pays} \tn % Row Count 3 (+ 2) % Row 17 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Marginal cost}} = opportunity cost of committing funds to this asset rather than to an equally risky alternative} \tn % Row Count 6 (+ 3) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{x{2.4885 cm} x{2.4885 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond features}} \tn % Row 0 \SetRowColor{LightBackground} Floating-rate bonds & Bonds that make coupon payments that vary through time. The coupon payments are usually tied to a benchmark market interest rate \tn % Row Count 7 (+ 7) % Row 1 \SetRowColor{white} & also called variable-rate bonds \tn % Row Count 9 (+ 2) % Row 2 \SetRowColor{LightBackground} & provide some protection against interest rate risk \tn % Row Count 12 (+ 3) % Row 3 \SetRowColor{white} & If market interest rates increase, then eventually, so do the bond's coupon payments \tn % Row Count 17 (+ 5) % Row 4 \SetRowColor{LightBackground} & Makes borrowers future cash obligations unpredictable \tn % Row Count 20 (+ 3) % Row 5 \SetRowColor{white} & Risk is transferred from buyer to issuer \tn % Row Count 22 (+ 2) % Row 6 \SetRowColor{LightBackground} London Interbank Offered Rate (LIBOR) & The interest rate that banks in London charge each other for overnight loans. Widely used as a benchmark interest rate for short-term fl oatingrate debt. \tn % Row Count 30 (+ 8) \end{tabularx} \par\addvspace{1.3em} \vfill \columnbreak \begin{tabularx}{5.377cm}{x{2.4885 cm} x{2.4885 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond features (cont)}} \tn % Row 7 \SetRowColor{LightBackground} Cash rate & Rate Aus banks charge each other for overnight loans \tn % Row Count 3 (+ 3) % Row 8 \SetRowColor{white} Spread & The difference between the rate that a lender charges for a loan and the underlying benchmark interest rate \tn % Row Count 9 (+ 6) % Row 9 \SetRowColor{LightBackground} & Also called the credit spread \tn % Row Count 11 (+ 2) % Row 10 \SetRowColor{white} & to the benchmark interest rate, according to the risk of the borrower \tn % Row Count 15 (+ 4) % Row 11 \SetRowColor{LightBackground} & Lenders charge higher spreads for less creditworthy borrowers \tn % Row Count 19 (+ 4) % Row 12 \SetRowColor{white} Capital indexed bonds / inflation linked bonds & Issued by Aus govt, face value changes each year with inflation \tn % Row Count 23 (+ 4) % Row 13 \SetRowColor{LightBackground} Unsecured debt & Debt instruments issued by an entity backed only by faith and credit score of borrowing company \tn % Row Count 28 (+ 5) % Row 14 \SetRowColor{white} Subordinated unsecured debt & Debt instruments issued by an entity which is backed only by the credit of the borrowing entity which is paid only after senior debt is paid \tn % Row Count 35 (+ 7) \end{tabularx} \par\addvspace{1.3em} \vfill \columnbreak \begin{tabularx}{5.377cm}{x{2.4885 cm} x{2.4885 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond features (cont)}} \tn % Row 15 \SetRowColor{LightBackground} Collateral & The specifi c assets pledged to secure a loan. \tn % Row Count 3 (+ 3) % Row 16 \SetRowColor{white} Mortgage bonds & A bond secured by real estate or buildings \tn % Row Count 6 (+ 3) % Row 17 \SetRowColor{LightBackground} Collateral trust bonds & A bond secured by financial assets held by a trustee \tn % Row Count 9 (+ 3) % Row 18 \SetRowColor{white} Debentures & Usually backed by property \tn % Row Count 11 (+ 2) % Row 19 \SetRowColor{LightBackground} Equipment trust certificates & A bond often secured by various types of transportation equipment \tn % Row Count 15 (+ 4) % Row 20 \SetRowColor{white} Pure discount bonds & Bonds that pay no interest and sell below par value. Also called zero-coupon bonds. \tn % Row Count 20 (+ 5) % Row 21 \SetRowColor{LightBackground} Convertible bond & A bond that gives investors the option to convert their bonds into the issuer's common stock. \tn % Row Count 25 (+ 5) % Row 22 \SetRowColor{white} Exchangeable bonds & Bonds issued by corporations which may be converted into shares of a company other than the company that issued the bonds. \tn % Row Count 32 (+ 7) \end{tabularx} \par\addvspace{1.3em} \vfill \columnbreak \begin{tabularx}{5.377cm}{x{2.4885 cm} x{2.4885 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond features (cont)}} \tn % Row 23 \SetRowColor{LightBackground} Callable & Bonds that the issuer can repurchase from investors at a predetermined price known as the call price \tn % Row Count 5 (+ 5) % Row 24 \SetRowColor{white} Call price & The price at which a bond issuer may call or repurchase an outstanding bond from investors \tn % Row Count 10 (+ 5) % Row 25 \SetRowColor{LightBackground} Putable bonds & Bonds that investors can sell back to the issuer at a predetermined price under certain conditions \tn % Row Count 15 (+ 5) % Row 26 \SetRowColor{white} Sinking fund & A provision in a bond indenture that requires the borrower to make regular payments to a third-party trustee for use in repurchasing outstanding bonds, gradually over time \tn % Row Count 24 (+ 9) % Row 27 \SetRowColor{LightBackground} Protective covenants & Specify requirements that the borrower must meet as long as bonds remain outstanding \tn % Row Count 29 (+ 5) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{x{1.4931 cm} x{3.4839 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond Vocabulary}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Fundamentally, a bond is just a loan} \tn % Row Count 1 (+ 1) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Bonds make interest-only payments until they mature} \tn % Row Count 3 (+ 2) % Row 2 \SetRowColor{LightBackground} Principal & The amount of money on which interest is paid \tn % Row Count 5 (+ 2) % Row 3 \SetRowColor{white} Maturity date & The date when a bond's life ends and the borrower must make the fi nal interest payment and repay the principal. \tn % Row Count 10 (+ 5) % Row 4 \SetRowColor{LightBackground} Par value (bonds) & The face value of a bond, which the borrower repays at maturity \tn % Row Count 13 (+ 3) % Row 5 \SetRowColor{white} & Typically \$1,000 for corporate bonds \tn % Row Count 15 (+ 2) % Row 6 \SetRowColor{LightBackground} Coupon & A fixed amount of interest that a bond promises to pay investors \tn % Row Count 18 (+ 3) % Row 7 \SetRowColor{white} & Usually semiannually \tn % Row Count 19 (+ 1) % Row 8 \SetRowColor{LightBackground} Indenture & A legal document stating the conditions under which a bond has been issued \tn % Row Count 22 (+ 3) % Row 9 \SetRowColor{white} & Specifies dollar amount of coupon \tn % Row Count 24 (+ 2) % Row 10 \SetRowColor{LightBackground} & Specifies when the borrower must make coupon payments \tn % Row Count 26 (+ 2) % Row 11 \SetRowColor{white} Coupon rate & The rate derived by dividing the bond's annual coupon payment by its par value. \tn % Row Count 29 (+ 3) % Row 12 \SetRowColor{LightBackground} Coupon yield & The amount obtained by dividing the bond's coupon by its current market price (which does not always equal its par value). Also called current yield \tn % Row Count 35 (+ 6) \end{tabularx} \par\addvspace{1.3em} \vfill \columnbreak \begin{tabularx}{5.377cm}{x{1.4931 cm} x{3.4839 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond Vocabulary (cont)}} \tn % Row 13 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Might have additional features:} \tn % Row Count 1 (+ 1) % Row 14 \SetRowColor{white} - & {\bf{Call feature}} allows the issuer to redeem the bond at a predetermined price prior to maturity \tn % Row Count 5 (+ 4) % Row 15 \SetRowColor{LightBackground} - & {\bf{Conversion feature}} grants bondholders right to redeem bonds for a predetermined number of shares of stock in borrowing firm \tn % Row Count 10 (+ 5) % Row 16 \SetRowColor{white} Premium & A bond that sells for more than its par value \tn % Row Count 12 (+ 2) % Row 17 \SetRowColor{LightBackground} & Selling at a better than market return \tn % Row Count 14 (+ 2) % Row 18 \SetRowColor{white} & As more investors buy the price goes up \tn % Row Count 16 (+ 2) % Row 19 \SetRowColor{LightBackground} Yield to maturity & The discount rate that equates the present value of the bond's cash flows to its market price \tn % Row Count 20 (+ 4) % Row 20 \SetRowColor{white} Discount & A bond sells at a discount when its market price is less than its par value \tn % Row Count 23 (+ 3) % Row 21 \SetRowColor{LightBackground} & Might be offset with a built-in gain at maturity \tn % Row Count 25 (+ 2) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} x{4.4793 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Changes in Issuer Risk}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{When macroeconomic factors change} \tn % Row Count 1 (+ 1) % Row 1 \SetRowColor{white} - & Yields may change simultaneously on a wide range of bonds \tn % Row Count 3 (+ 2) % Row 2 \SetRowColor{LightBackground} - & Return on a particular bond can also change as market reassesses borrower's default risk (risk issuer could default on payments) \tn % Row Count 7 (+ 4) % Row 3 \SetRowColor{white} - & Changes may be positive or negative \tn % Row Count 8 (+ 1) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{x{1.9908 cm} x{2.9862 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Issuer types}} \tn % Row 0 \SetRowColor{LightBackground} Treasury bonds & Debt instruments issued by the federal government with maturities of up to 30 years \tn % Row Count 4 (+ 4) % Row 1 \SetRowColor{white} Corporate bonds & Issued by corporations \tn % Row Count 5 (+ 1) % Row 2 \SetRowColor{LightBackground} - & Finance new investments \tn % Row Count 6 (+ 1) % Row 3 \SetRowColor{white} - & Fulfil other needs \tn % Row Count 7 (+ 1) % Row 4 \SetRowColor{LightBackground} - & Range from 1 - 100 years \tn % Row Count 8 (+ 1) % Row 5 \SetRowColor{white} - & Under 10 years usually called a {\emph{note}} means the same \tn % Row Count 11 (+ 3) % Row 6 \SetRowColor{LightBackground} - & Most corporate bonds have a par value of \$1,000 and pay interest semiannually \tn % Row Count 15 (+ 4) % Row 7 \SetRowColor{white} Australian government bonds & Issued by Australian government \tn % Row Count 17 (+ 2) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{x{1.14471 cm} x{3.83229 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond Markets}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Larger than the stock market} \tn % Row Count 1 (+ 1) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Bond Price Quotations} \tn % Row Count 2 (+ 1) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{bond prices are quoted as a percentage of par values} \tn % Row Count 4 (+ 2) % Row 3 \SetRowColor{white} Yield spread & The diff erence in yield to maturity between two bonds or two classes of bonds with similar maturities \tn % Row Count 8 (+ 4) % Row 4 \SetRowColor{LightBackground} Basis point & 1/100 of 1 percent; 100 basis points equal 1.000 percent \tn % Row Count 10 (+ 2) % Row 5 \SetRowColor{white} Bond ratings & Letter ratings assigned to bonds by specialized agencies that evaluate the capacity of bond issuers to repay their debts. Lower ratings signify higher default risk. \tn % Row Count 16 (+ 6) % Row 6 \SetRowColor{LightBackground} Junk bonds & Bonds rated below investment grade. Also known as high-yield bonds \tn % Row Count 19 (+ 3) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} p{0.4977 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Basic bond valuing equation}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Bond makes a fixed coupon payment each year} \tn % Row Count 1 (+ 1) \hhline{>{\arrayrulecolor{DarkBackground}}--} \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Po = C / (1 + r)\textasciicircum{}1\textasciicircum{} + C / (1 + r)\textasciicircum{}2\textasciicircum{} + ... + C / (1 + r)\textasciicircum{}n\textasciicircum{} + M / (1 + r)\textasciicircum{}n\textasciicircum{}}}} \tn \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} p{0.4977 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Semiannual Compounding}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Most bonds make 2 payments a year} \tn % Row Count 1 (+ 1) \hhline{>{\arrayrulecolor{DarkBackground}}--} \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Po = (C / 2) / (1 + r)\textasciicircum{}1\textasciicircum{} + (C / 2) / (1 + r)\textasciicircum{}2\textasciicircum{} + ... + (C / 2) / (1 + r)\textasciicircum{}2n\textasciicircum{} + M / (1 + r)\textasciicircum{}2n\textasciicircum{}}}} \tn \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} p{0.4977 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Factors affecting bond prices}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{A bonds market price changes frequently as time passes} \tn % Row Count 2 (+ 2) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{{\bf{Term to maturity}}} \tn % Row Count 3 (+ 1) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Whether a bond sells at a discount or a premium, its price will converge to par value (+ final interest payment) as maturity date draws near.} \tn % Row Count 6 (+ 3) % Row 3 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{{\bf{Economic Forces}}} \tn % Row Count 7 (+ 1) % Row 4 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Most important factor is prevailing market interest rate} \tn % Row Count 9 (+ 2) % Row 5 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{{\bf{Required return}}} \tn % Row Count 10 (+ 1) % Row 6 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{When required return on a bond changes, bonds price changes in opposite direction} \tn % Row Count 12 (+ 2) % Row 7 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Higher bonds required return = lower its price, and vice versa} \tn % Row Count 14 (+ 2) % Row 8 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{General lessons}}} \tn % Row Count 15 (+ 1) % Row 9 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Bond prices and interest rates move in opposite directions} \tn % Row Count 17 (+ 2) % Row 10 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Prices of long-term bonds display greater sensitivity to changes in interest rates than do prices of short-term bonds} \tn % Row Count 20 (+ 3) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} x{4.4793 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Interest Rate Risk}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Risk that changes in market interest rates will move bond price} \tn % Row Count 2 (+ 2) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Interest rates fluctuate widely, so investors must be aware of interest rate risk} \tn % Row Count 4 (+ 2) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Inherent in these instruments} \tn % Row Count 5 (+ 1) % Row 3 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Inflation is a main factor} \tn % Row Count 6 (+ 1) % Row 4 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Important because}}} \tn % Row Count 7 (+ 1) % Row 5 \SetRowColor{white} - & When investors buy financial assets, they expect these investments to provide a return that exceeds inflation rate. \tn % Row Count 11 (+ 4) % Row 6 \SetRowColor{LightBackground} - & Investors want to achieve a better standard of living by saving and investing their money \tn % Row Count 14 (+ 3) % Row 7 \SetRowColor{white} - & If asset returns do not exceed inflation investors are not better off for having invested \tn % Row Count 17 (+ 3) % Row 8 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Real return}}} \tn % Row Count 18 (+ 1) % Row 9 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Bond yields must offer investors a positive real return} \tn % Row Count 20 (+ 2) % Row 10 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Approximately equals difference between stated or nominal return and inflation rate} \tn % Row Count 22 (+ 2) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} \begin{tabularx}{5.377cm}{p{0.4977 cm} p{0.4977 cm} } \SetRowColor{DarkBackground} \mymulticolumn{2}{x{5.377cm}}{\bf\textcolor{white}{Bond Markets}} \tn % Row 0 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Many types of bonds in modern financial markets} \tn % Row Count 1 (+ 1) % Row 1 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Many bonds provide a steady, predictable stream of income} \tn % Row Count 3 (+ 2) % Row 2 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Others have exotic features that make returns volatile and unpredictable} \tn % Row Count 5 (+ 2) % Row 3 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Bond trading occurs in either primary or secondary market} \tn % Row Count 7 (+ 2) % Row 4 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Primary market}} trading} \tn % Row Count 8 (+ 1) % Row 5 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Initial sale of bonds by firms or government entities} \tn % Row Count 10 (+ 2) % Row 6 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Might be through auction process} \tn % Row Count 11 (+ 1) % Row 7 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{With help of investment bankers who assist bond issuers with design, marketing, and distribution of new bond issues} \tn % Row Count 14 (+ 3) % Row 8 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{Once issued in primary market, investors trade them with each other in secondary market} \tn % Row Count 16 (+ 2) % Row 9 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Often purchased by institutional investors who hold bonds for a long time} \tn % Row Count 18 (+ 2) % Row 10 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{{\bf{Secondary market}}} \tn % Row Count 19 (+ 1) % Row 11 \SetRowColor{white} \mymulticolumn{2}{x{5.377cm}}{Because institutions hold bond for a long time, trading in bonds can be somewhat limited} \tn % Row Count 21 (+ 2) % Row 12 \SetRowColor{LightBackground} \mymulticolumn{2}{x{5.377cm}}{But bond market is large which means investors have a wide range of choices} \tn % Row Count 23 (+ 2) \hhline{>{\arrayrulecolor{DarkBackground}}--} \end{tabularx} \par\addvspace{1.3em} % That's all folks \end{multicols*} \end{document}