Best Response

I'm assuming they are asking about actually pricing a primary market issue so this isn't the answer you want to give... you look at comps and secondary trading of bonds with similar security, rating and term to find the credit spread... add that to the applicable benchmark to get your yield, talk to your desk about couponing (assuming it isn't a par bond) and calculate the price based on your respective settlement/maturity/call dates... let me know if you want more info on actual pricing week/day tasks/logistics...

 

I've had multiple phone interviews this month for BB firms. I'm a Junior at an ivy-league school.

If you're not a quant guy or a finance major, they will not ask you any of this. It's mainly focused on your view of the market, a stock pitch, and behavioral/fit questions.

You're over preparing and psyching yourself out. Just be yourself and things will run smoothly.

 

If I'm not mistaken you could simply use the formula for the summation of a geometric series, in this case with common ratio 1/1.04 (google it) to compute the 646.06, and then just evaluate the second term.

 

Not totally sure, but couldn't you just convert YTM to quarters (2.5% every 3 months) and assume that the coupon payments come on every other quarter?

So something like:

B_n = 100/(1+0.10/4)^n

For 1, 3, 5, ..., N

If that doesn't work, and you have the 3 month YTM, you could value the bond as if it were to be purchased on 7/1, then discount that back to 4/1 using the 3 month yield.

The second method should work for sure, not totally sure on the first one because I don't know if you can skip every other period like that.

 

The difficult thing about bonds is the fact that no two bonds are alike. Therefore, there is no really standard way to answer your question. But remember, the price of any financial asset is the present value of its future cash flows. With bonds, the only cash flows typically associated with it are the coupon payments (paid semi-annually typically) and the return of the face value at the time of maturity. Therefore, to value bonds, you simply take the sum of the present value of all of the coupon payments and the present value of the face value repayment at the time of maturity. For high yield bonds and callable bonds, you can factor in risk premiums as necessary.

In terms of comparing bonds, most people look at yield to maturity and yield to call (if the bond is callable).

I'm confused at how you can understand valuing MBS but not simple corporate debt. Perhaps you're overthinking?

 

Hey - thanks for the quick response. I understand the basic valuation technique. but what I am asking for is something different. My question is more towards how to track or conduct survaillance of a bond you own. As in after puchasing the bond, how do i track the risk (that changes over time) that the underlying company will not default and if they do, what recourse do i have (i.e. where in the debt claim hierarchy do i stand). so ig uess what i am asking for is how to track this risk or adjust for the risk premium... for isntance, looking at Debt to Equity ratio, measuring the Beta of the company relative to a benchmark, looking at the quick ration or liquiditiy ratio of the company. So things like that... Essentially, I want to compile a list of metrics that i should be looking at to measure the inherent risk of the underlying company. thanks!!

 

Bizarre - the security appeared in a bond screener and I didn't even think of it. Let me present another one; my confusion is with bond valuation in general, anyway:

Price: 111.40 Coupon (%): 11.000 Maturity Date: 14-Jan-2013 YTM (%): 0.755 Current Yield (%): 9.875 First Coupon Date: 14-Jul-2003 Dated Date: 14-Jan-2003 Coupon Payment Frequency: Semi-Annual

I tried the same steps for this to determine why its priced at 111.40 and am still not obtaining the correct answer. Thank you for your help.

 
klausdaimler:
Bizarre - the security appeared in a bond screener and I didn't even think of it. Let me present another one; my confusion is with bond valuation in general, anyway:

Price: 111.40 Coupon (%): 11.000 Maturity Date: 14-Jan-2013 YTM (%): 0.755 Current Yield (%): 9.875 First Coupon Date: 14-Jul-2003 Dated Date: 14-Jan-2003 Coupon Payment Frequency: Semi-Annual

I tried the same steps for this to determine why its priced at 111.40 and am still not obtaining the correct answer. Thank you for your help.

This is weird to me. This bond, as of today, has total cashflows of $111.00 left, to be paid in January. How it could trade above that amount (at $111.40) does not makes sense to me. What date are the prices as of?

EDIT: Is your YTM positive? I got a lot closer to your price using a negative yield of the same magnitude which I guess could be the case if it is a Treasury that is yielding negative (nominally, not in real terms)

 

[quote=klausdaimler]I'm assuming that the actual price it's trading at is $1,114.0, as prices are quoted as % of face value, right? The coupons would be $110 (11% multiplied by face value $1,000).

Price is as of today. Please refer to the following link, this is where I found the security: http://reports.finance.yahoo.com/z2?ce=4915654150561546016755&q=b%3d4%2…] Semi-annual coupon of 11% = $55 interest payment in January....total payment of $1,055 in January The price of the bond should be less than that. This just looks like a stale price to me. Meaning, this CUSIP might not have traded recently and that is the last trade price reported, which could have been a long time ago.

 

The only time this would come up is in a liquidation scenario, in which case you would just take all your tangible assets and start subtracting liabilities by seniority. e.g. if a company has $100MM of saleable assets (goodwill being $0 and lets assume intangibles too), and a $50MM bond but there are $75MM of liabilities that rank senior to the bond, I would only pay 50% for the bond because I would only get back $25MM of the principal amount.

In a going concern analysis you'd value the company and then waterfall that value down the capital structure. So instead of looking at the value of balance sheet assets, you'd take the value of the company you got through DCF/comps and use that as the starting point.

 
mrb87:
In a going concern analysis you'd value the company and then waterfall that value down the capital structure. So instead of looking at the value of balance sheet assets, you'd take the value of the company you got through DCF/comps and use that as the starting point.

Could you expand on this? I get that you'll come up with an enterprise value range. What are the next steps? And are you assuming that the fulcrum security is already converted to equity and original shareholders are wiped out at this point?

 

I was looking over their website but failed to find a piece about this, care to share the website ?

Maybe I do not have quotes under my name on google, but I KEEP IT REAL
 

Any more takes on this ?

thaThrilla, good point, we ll see what this new issuance be though....

Maybe I do not have quotes under my name on google, but I KEEP IT REAL
 

origination , don t know if that should affect my thinking ability somehow. Yea they are both senior unsecured, now that LUKOIL priced, it is trading below par......I know its not the same coupon its about 1.125% lower. but still the pricing (coupon) is in line with the recent issues coming from the region + its giving better yields even if it was trading at par.

As i said i mentioned before that i thought thatpeople would prefer buying this bond over th outstanding 19s, apparently that is not the case though......i just can not find a reason for this , despite that after reading about the company for a bit i see that some of the previous problems they had ( conflict with TNK, buying back share from conoco philips ) has been resolved......

Any more thoughts on this.....I know am thinking a bit amateurly here, but i assure you I don t have years of experience when it comes to this

cheers

Maybe I do not have quotes under my name on google, but I KEEP IT REAL
 

just curious, so you're researching this in order to learn how to price future issues? by the way, the luk 19s are callable at make whole +50bps. don't know what difference that makes tho.

im thinking the markets just trading down overall for new issues. the older issues seem to be holding up but the recent new issues just don't seem to be doing well.

 

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Maybe I do not have quotes under my name on google, but I KEEP IT REAL
 

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Maybe I do not have quotes under my name on google, but I KEEP IT REAL

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