Valuation principle
The basic principle of bond valuation is discounted cash flow method.
(A) the determination of bond cash flow
(B) the determination of bond discount rate
The discount rate of bonds is the lowest rate of return required by investors for bonds, also known as the necessary rate of return:
Necessary bond yield = actual risk-free interest rate+expected inflation rate+risk premium
Edit bond valuation model
According to the basic principle of cash flow discount method, the theoretical price calculation formula of bonds without implied options is:
(1) zero coupon bond
In zero coupon bond, interest is excluded, while in discounted bonds, the principal is repaid at maturity. Usually, bonds within 1 year are zero-coupon bonds.
P=FV/( 1+yT)T
FV is the face value of zero coupon bond.
(2) Pricing of interest-bearing bonds
Interest-bearing bonds can be regarded as a combination of zero-interest bonds. Use (2.5) to price each bond separately, and then add them up. You can also use (2.4) directly.
(3) Pricing of interest-bearing bonds
Analysis direction
Bond quotation and payment price
(1) quotation form
(2) Calculation of interest
1. Short-term bonds
2. Medium and long-term interest-bearing bonds
3. Discounted bonds
bond yield
(A) the current rate of return
It reflects the annual interest income of bonds that can be obtained by unit investment, but does not reflect the capital gains and losses of unit investment. The formula is:
(2) yield to maturity
The yield to maturity (YTM) of bonds is the same as the discount rate used to make the present value of future cash flows of bonds equal to the current price. Internal rate of return.
(3) Spot interest rate
Spot interest rate is also called zero interest rate, which is the abbreviation of zero coupon bond yield to maturity. In the bond pricing formula, spot interest rate is the discount rate used by discounted cash flow method.
(4) Holding period yield
The holding period yield is defined as the average annual income from buying bonds to selling bonds. The only difference between it and yield to maturity is that the final cash flow is the selling price, not the due repayment amount of the bond.
(v) Redemption proceeds
A callable bond refers to a bond that allows the issuer to redeem at an agreed price before the bond expires. Usually, when the expected market interest rate drops, the issuer will issue redeemable bonds, so as to replace the issued bonds with bonds with low interest rate cost in the future.
Risk structure and term structure of bonds
(A) the risk structure of interest rates
The market prices of bonds with the same maturity and the same coupon rate issued by different issuers will be different, so the calculated bond yields are also different. This difference in yield is the risk structure of interest rate.
(B) Term structure of interest rates
1. Term structure and yield curve.
2. The basic types of yield curve
3. Term structure theory of interest rate
The term structure theory of interest rate is based on these three factors.
1. Market expectation theory (unbiased expectation theory)
2. liquidity preference theory
3. Market segmentation theory