Bodie, Kane, & Marcus. (2024). Essentials of Investments 12th Edition (Loose-leaf) with Connect. New York, NY: McGraw-Hill. ISBN: 978-1-264-93758-5.
- Read: Bodie, Kane, & Marcus: Chapter 10
- Read: Bodie, Kane, & Marcus: Chapter 11
- Read: Bond Prices and Yield
- Read: Managing Bond Portfolios
- Read: Chapter Ten Bond Prices and Yield
- Read: Chapter Eleven Managing Bond Portfolios
- Watch: Introduction to bonds | Stocks and bonds | Finance & Capital Markets
INSTRUCTIONS
Each thread must be at least 500–750 words, include 2 peer-reviewed references, include biblical
scripture integrations, and demonstrate course-related knowledge.
Discussion Thread: Investing, Budgeting, Wealth Management
With the exclusion of Matthew 25: 14-30, please choose 4 scriptures that relate to the topic of investing, budgeting, and wealth management.
Integrate the scriptures with the material from the text and from online resources to demonstrate how the Bible is vital to the principles of investments and/or your own investment strategies for retirement.
Please make sure that your own original analysis of each scripture is provided.
Managing Bond Portfolios
Bodie, Kane, and Marcus
Essentials of Investments Eleventh Edition
11
Chapter
11.1 Interest Rate Risk
Interest Rate Sensitivity
Bond prices and yields are inversely related
Increase in bond’s yield to maturity results in smaller price change than yield decrease of equal magnitude
Long-term bond prices more sensitive to interest rate changes than short-term bonds
As maturity increases, sensitivity of bond prices to changes in yields increases at decreasing rate
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11.1 Interest Rate Risk
Interest Rate Sensitivity
As maturity increases, sensitivity of bond prices to changes in yields increases at decreasing rate
Interest rate risk is inversely related to bond’s coupon rate; low-coupon bonds are more sensitive to interest rates
Sensitivity of bond’s price-to-yield change is inversely related to current yield to maturity
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Figure 11.1 Change in Bond Prices as a Function of Change in Yield to Maturity
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11.1 Interest Rate Risk: Coupons Rate and Sensitivity
Prices of zero-coupon bonds
Prices of 8% annual coupon bonds
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11.1 Interest Rate Risk
Macaulay’s Duration
Measures effective bond maturity
Weighted average of the times until each payment, with weights proportional to the present value of payment
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Spreadsheet 11.1 Calculation of Duration of Two Bonds
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11.1 Interest Rate Risk
Change in Bond Price to Yield to Maturity
Modified Duration
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Spreadsheet 11.2 Computing Duration
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11.1 Interest Rate Risk
What Determines Duration?
Zero-coupon bond’s duration is time to maturity
Time/yield to maturity constant, bond’s duration and interest-rate sensitivity higher when coupon price lower
Coupon rate constant, bond’s duration and interest-rate sensitivity generally increase with time to maturity; duration always increases with maturity for bonds at or above par
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11.1 Interest Rate Risk
What Determines Duration?
Other factors constant, duration and interest rate sensitivity of coupon bond higher when bond’s yield to maturity lower
Duration of a perpetuity
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Figure 11.2 Duration as Function of Maturity
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Table 11.3 Annual Coupon Bond Duration
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11.2 Passive Bond Management
Immunization
Strategy to shield net worth from interest rate movements
Rebalancing
Realigning proportions of assets in portfolio as needed
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Table 11.4 Terminal Value of Bond Portfolio after Five Years
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Figure 11.3 Growth of Invested Funds
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Table 11.5 Market Value Balance Sheets
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Figure 11.4 Immunization
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11.2 Passive Bond Management
Cash Flow Matching and Deduction
Cash flow matching
Matching cash flows from fixed-income portfolio with those of obligation
Deduction strategy
Multi-period cash flow matching
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11.3 Convexity
Convexity
Curvature of price-yield relationship of bond
Why Do Investors Like Convexity?
More convexity = greater price increases, smaller price decreases when interest rates fluctuate by larger amounts
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Figure 11.5 Bond Price Convexity
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11.4 Active Bond Management: Strategies
| Sources of Potential Profit | Strategy |
| Substitution swap | Exchange of one bond for bond with similar attributes and better price |
| Intermarket swap | Switching from one segment of bond market to another |
| Rate anticipation swap | Switch made in response to forecasts of interest rate changes |
| Pure yield pickup swap | Moving to higher yield bonds, usually with longer maturities |
| Tax swap | Swapping two similar bonds to receive tax benefit |
| Horizon analysis | Forecast of bond returns based largely on prediction of yield curve at end of investment horizon |
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11.4 Active Bond Management
Fixed-Income Investment Strategy
Key features
Firms respect market
,
Bond Prices and Yield
Bodie, Kane, and Marcus
Essentials of Investments Eleventh Edition
10
Chapter
10.1 Bond Characteristics
Bond
Security that obligates issuer to make payments to holder over time
Face Value, Par Value
Payment to bondholder at maturity of bond
Coupon Rate
Bond’s annual interest payment per dollar of par value
Zero-Coupon Bond
Pays no coupons, sells at discount, provides only payment of par value at maturity
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Figure 10.1 Prices/Yields of U.S. Treasury Bonds
| Source: Wall Street Journal Online, August 15, 2014. |
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10.1 Bond Characteristics
Treasury Bonds and Notes
Accrued interest and quoted bond prices
Quoted prices do not include interest accruing between payment dates
Accrued interest
Example: Consider a bond with the following characteristics: Semi-annual payments, coupon rate of 6%, $1,000 par value. If 45 days have passed since the last coupon payment, what is the accrued interest?
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Figure 10.2 Listing of Corporate Bonds
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10.1 Bond Characteristics
Corporate Bonds
Call provisions on corporate bonds
Callable bonds: May be repurchased by issuer at specified call price during call period
Convertible bonds
Allow bondholder to exchange bond for specified number of common stock shares
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10.1 Bond Characteristics
Corporate Bonds
Puttable bonds
Holder may choose to exchange for par value or to extend for given number of years
Floating-rate bonds
Coupon rates periodically reset according to specified market date
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10.1 Bond Characteristics
Preferred Stock
Commonly pays fixed dividend
Floating-rate preferred stock becoming more popular
Dividends not normally tax-deductible
Corporations that purchase other corporations’ preferred stock are taxed on only 30% of dividends received
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10.1 Bond Characteristics
Other Domestic Issuers
State, local governments (municipal bonds)
Federal Home Loan Bank Board
Farm Credit agencies
Ginnie Mae, Fannie Mae, Freddie Mac
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10.1 Bond Characteristics
International Bonds
Foreign bonds
Issued by borrower in different country than where bond sold
Denominated in currency of market country
Eurobonds
Denominated in currency (usually that of issuing country) different than that of market
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10.1 Bond Characteristics
Innovation in the Bond Market
Inverse floaters
Coupon rate falls when interest rates rise
Asset-backed bonds
Income from specified assets used to service debt
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10.1 Bond Characteristics
Innovation in the Bond Market
Pay-in-kind bonds
Issuers can pay interest in cash or additional bonds
Catastrophe bonds
Higher coupon rates to investors for taking on risk
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10.1 Bond Characteristics
Innovation in the Bond Market
Indexed bonds
Payments tied to general price index/price of particular commodity
Treasury Inflation Protected Securities (TIPS): Par value of bond increases with consumer price index
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Table 10.1 TIPS, Principal and Interest Payments
Principal and interest payments for a Treasury Inflation Protected Security
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10.2 Bond Pricing
Bond value = Present value of coupons + Present par value
Bond value =
T = Maturity date
r = discount rate
Bond price =
=
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10.2 Bond Pricing: Example
What is the price of the following two bonds:
| Bond A | Bond B | |
| Maturity (T) | 4 Years | 30 Years |
| Coupon Rate (C) | 5% | 5% |
| Discount Rate (r) | 8% | 8% |
| Par Value (FV) | $1,000 | $1,000 |
Present Value of Coupons
Present Par Value
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10.2 Bond Pricing
Prices fall as market interest rate rises
Interest rate fluctuations are primary source of bond market risk
Bonds with longer maturities more sensitive to fluctuations in interest rate
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Figure 10.3 Inverse Relationship between Bond Prices and Yields
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Table 10.2 Bond Prices at Different Interest Rates
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10.2 Bond Pricing
Bond Pricing between Coupon Dates
Invoice price = Flat price + Accrued interest
Bond Pricing in Excel
=PRICE (settlement date, maturity date, annual coupon rate, yield to maturity, redemption value as percent of par value, number of coupon payments per year)
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Spreadsheet 10.1 Valuing Bonds
Note: Spreadsheets available in Connect
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10.3 Bond Yields
Yield to Maturity
Discount rate that makes present value of bond’s payments equal to price.
Current Yield
Annual coupon divided by bond price
Premium Bonds
Bonds selling above par value
Discount Bonds
Bonds selling below par value
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Spreadsheet 10.2 Finding Yield to Maturity
| Semiannual coupons | Annual coupons | ||
| Settlement date | 1/1/2000 | 1/2/2000 | |
| Maturity date | 1/1/2030 | 1/2/2030 | |
| Annual coupon rate | 0.08 | 0.08 | |
| Bond price (flat) | 127.676 | 127.676 | |
| Redemption value (% of face value) | 100 | 100 | |
| Coupon payments per year | 2 | 1 | |
| Yield to maturity (decimal) | 0.0600 | 0.0599 | |
| The formula entered here is =YIELD(B3,B4,B5,B6,B7,B8) |
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10.3 Bond Yields
Yield to Call
Calculated like yield to maturity
Time until call replaces time until maturity; call price replaces par value
Premium bonds more likely to be called than discount bonds
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Figure 10.4 Bond Prices: Callable and Straight Debt
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10.3 Bond Yields
Realized Compound Returns versus Yield to Maturity
Realized compound return
Compound rate of return on bond with all coupons reinvested until maturity
Horizon analysis
Analysis of bond returns over multiyear horizon
Based on forecasts of bond’s YTM and investment options
Reinvestment rate risk
Uncertainty surrounding cumulative future value of reinvested coupon payments
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Figure 10.5 Growth of Invested Funds
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