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Government bonds bond price/yield

From Figure 7.3, we see fliat to price a very Iraig-dated bond off the yield of the 30-year government bond would lead to errors. The unbiased expectations hypothesis suggests that 100-year bond yields are essentially identical to 30-year yields however, this is in fact incorrect. The theoretical 100-year yield in fact will be approximately 20-25 basis points lower. This reflects the convexity bias in longer dated yields. In our illustration, we used a hypothetical scenario where only three possible interest-rate states were permitted. Dybvig and Marshall showed that in a more realistic environment, with forward rates calculated using a Monte Carlo simulation, similar observations would result. Therefore, the observations have a practical relevance. [Pg.147]

Now let us imagine that the yield on a 100-year government bond with a coupon of 6.00% is 6.20%. This fits investor expectations that the very longdated bond should have a yield premium of approximately 20 basis points. This would set the price of the 100-year bond as ... [Pg.149]

The general rule of corporate bonds is that they are priced at a spread to the government yield curve. In absolute terms, the yield spread is the difference between the yield to maturity of a corporate bond and the benchmark, generally a yield to maturity of a govermnent bond with the same maturity. Corporate bonds include a yield spread on a risk-free rate in order to compensate two main factors, liquidity premium and credit spread. The yield of a corporate bond can be assumed as the sum of parts of the elements as shown in Figure 8.1, in which the yield spread relative to a default-free bond is given by the sum of default premium (credit spread) and liquidity premium. [Pg.156]

Figure 8.2 shows the Bloomberg YAS page for Tesco bond SVi% 2019, as at October 9, 2014. The bond has a price of 109.345 and yield to maturity of 3.46%. On the date, the yield spread over a government bond benchmark UK 41 % Treasury 2019 is 200 basis points. The G-spread over an interpolated government bond is 181.5 basis points. Conventionally, the difference between these two spreads is narrow. We see also that the asset-swap spread is 173.6 basis points and Z-spread is 166.3 basis points. [Pg.158]

This means that p f) is the expected value of the present value of the bond s cash flows, that is, the expected yield gained by buying the bond at the price p f) and holding it to maturity is r. If our required yield is r, for example this is the yield on the equivalent-maturity government bond, then we are able to determine the coupon rate C for which p r) is equal to 100. The default-risk spread that is required for a corporate bond means that C will be greater than r. Therefore, the theoretical default spread is C — r basis points. If there is a zero probability of default, then the default spread is 0 and C = r. [Pg.161]

The option-adjusted spread (OAS) is the most important measure of risk for bonds with embedded options. It is the average spread required over the yield curve in order to take into account the embedded option element. This is, therefore, the difference between the yield of a bond with embedded option and a government benchmark bond. The spread incorporates the future views of interest rates and it can be determined with an iterative procedure in which the market price obtained by the pricing model is equal to expected cash flow payments (coupons and principal). Also a Monte Carlo simulation may be implemented in order to generate an interest rate path. Note that the option-adjusted spread is influenced by the parameters implemented into the valuation model as the yield curve, but above all by the volatility level assumed. This is referred to volatility dependent. The higher the volatility, the lower the option-adjusted spread for a callable bond and the higher for a putable bond. [Pg.221]

The most actively traded government securities for various maturities are called benchmark issues. Yields on these issues serve as reference interest rates which are used extensively for pricing other securities. Exhibit 1.2 is a Bloomberg screen of the benchmark bonds issued by the government of the Netherlands. European government bonds will be discussed in Chapter 5. As an illustration of a corporate bond. Exhibit 1.3 shows a Bloomberg Security Description screen for 4.875% coupon bond issued by Pirelli SPA that matures on 21 October 2008. [Pg.6]

Research studies found that risk premiums fall in an environment of economic prosperity and rise when conditions are poor. Lower-rated corporations usually have less diversified sources of income and thus are more sensitive to changes in the macroeconomic situation than higherrated ones. Risk aversion increases with rising uncertainty and leads to higher expected compensation in the form of additional yield versus government bonds. Hence the effects of a company s individual actions to increase bondholder value can only inaccurately be measured. On the other hand, the spreads based on prices of the financial markets have anticipative character and reflect the expectations of a broad average of market participants. [Pg.26]

Bond 1 4% coupon Italian government bond maturing 1 March 2005 Full Price 104.1947 Yield 2.147%... [Pg.94]

Bond 2 5.75% coupon Italian government bond maturing 1 February 2033 Full Price 119.1198 Yield 4.727%... [Pg.94]

To illustrate the computation, let s examine a 4.2% coupon, lO-year Spanish government security that matures on July 30, 2013. Bloomberg s Yield Analysis Screen is presented in Exhibit 4.7. If the bond is priced to yield 3.724% on a settlement date of June 6, 2003, we can compute the PVBP by using the prices for either the yield at 3.734 or 3.714. The bond s initial full price at 3.724% is 104.5673. If the yield is decreased by 1 basis point to 3.714%, the PVBP is 0.085 (1104.5673 - 104.65221). Note that our PVBP calculation agrees with Bloomberg s calculation labeled PRICE VALUE OF A 0.01 that is presented in the Sensitivity Analysis box located in the lower left-hand corner of the screen. [Pg.97]

EXHIBIT 4.11 Price/Yield Relationship for a 2-Year and a 30-Year Italian Government Bonds... [Pg.100]

In the first two examples, we will look at an investor who, on 7 March 2003, is holding 50 million face value of a German government bond paying a 4.5% coupon, maturing on 4 January 2013, priced at 105.69 to yield 3.80%. [Pg.553]

B. Calculate the price of a French government zero-coupon bond with precisely five years to maturity, with the same required yield of 5.40 percent. Note that French government bonds pay coupon annually. [Pg.20]

Example A 9 8 government bond is purchased for delivery on June 22, 1992. The face value of this bond is 100,000 and the current yield is 6 percent, and it pays interest semiannually on May 15 and November 15. If this bond matures on November 15, l994, what is the quoted price of this bond and what price is actually paid ... [Pg.19]

Example On June 30, 1992, an investor settles on a 9.75 percent government coupon bond with a quoted yield of 5.25 percent. This bond has a face value of 100,000 and matures on September 15, 1992. What is the quoted price for this bond and what price is actually paid ... [Pg.20]

Thus the OAS is an indication of the value of the option element of the hond as well as the premium required by investors in return for accepting the default risk of the corporate bond. When OAS is measured as a spread between two bonds of similar default risk, the yield difference between the bonds reflects the value of the option element only. This is rare and the market convention is measure OAS over the equivalent benchmark government bond. OAS is used in the analysis of corporate bonds that incorporate call or put provisions, as well as mortgage-backed securities with prepayment risk. For both applications, the spread is calculated as the number of basis points over the yield of the government bond that would equate the price of both bonds. [Pg.266]

The term structure of interest rates is the spot rate yield curve spot rates are viewed as identical to zero-coupon bond interest rates where there is a market of liquid zero-coupon bonds along regular maturity points. As such a market does not exist anywhere the spot rate yield curve is considered a theoretical construct, which is most closely equated by the zero-coupon term structure derived from the prices of default-free liquid government bonds. [Pg.276]

The minimum interest rate that an investor should require is the yield available in the marketplace on a default-free cash flow. For bonds whose cash flows are denominated in euros, yields on European government securities serve as benchmarks for default-free interest rates. In some European countries, the swap curve serves as a benchmark for pricing spread product (e.g., corporate bonds). For now, we can think of the minimum interest rate that investors require as the yield on a comparable maturity benchmark security. [Pg.43]


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See also in sourсe #XX -- [ Pg.502 , Pg.503 ]




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