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You have to discount the future CF's....sum the PV of future expected coupon payments and the PV of the par value at maturity. This site explains it pretty well too http://www.investopedia.com/university/advancedbond/advancedbond2.asp
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...
Hi ChiTown82, can you please help me with some kind of a template / material for the bond pricing method you mentioned
In a distressed situation, you may want to consider alternative methods like asset coverage.
Interview prep: How to value a bond? (Originally Posted: 12/05/2012)
Long story short, I am waiting for phone interview from a BB. Would def mention the basic idea of reinvestment risk and discounting future cash flow, but still: 1. should I mention other types of bonds e.g. convertible bond? 2. should I mention stochastic calculus for the interest rate modeling? 3. should I explain how do I get the discount rate? (which I am not sure how you guys do it in real practices and would much appreciate if ppl could shed some light on this) Thank you guys!
Whatever you do just don't talk about anything you don't fully understand.
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.
It is always important to be fully prepared for all questions and topics, but if you are not fully comfortable with something do not bring it up
Just give them a basic 30 second answer. If they want more detail they'll ask follow-up questions, but the worst thing you can do is try to go too in-depth initially and shoot yourself in the foot (or bore your interviewer)
Valuing bonds (Originally Posted: 04/05/2013)
Hey guys, I can't figure out where the $646.06 is coming from in the attached problem. Any help? Thanks.
Nevermind figured it out in excel, I don't know why this would be on an exam by hand.
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.
Bond Valuation (Originally Posted: 02/24/2012)
I have a simple question regarding bond valuation and PV. Let's say I the BEY YTM of a bond is 10% (so 5% every six months), and I'm trying to calculate the PV of these coupon payments which are paid on 1/1 and 7/1. If I'm valuing the bond say between these six month periods, say 4/1, how do I adjust my PV formula given the 5% rate for the six months between coupon payments isn't accurate.
In this example, I'm buying a bond on 4/1, and receive a coupon payment in 3 months.
Any insight would be appreciated.
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.
Just build out the coupon schedule and discount. Much better than relying on a PV formula.
In real life you take into account accured int when the trade takes place.
How do i value a corporate bond such as a high yield bond (Originally Posted: 10/11/2014)
I would like to know not only how to value a bond but what metrics to view or track if I am a corporate bond holder. For isntance, for MBS you look at the underlying collateral, how its performing by looking at prepayment rates, severity and default rate along with bond specific metrics such as duration, convexity and VaR. Just like that, I would like to know what collateral level metrics should i look at when trying to identify the credit risk exposure to a corporate bond or high yield bond. I would appreciate as much detail as possible.
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!!
Good place to start would to be to look at how rating agencies assess deals. Look up S&P's ratings methodology and that'll give you a good idea as to what people might look at
Corporate Bond Valuation (Originally Posted: 10/06/2012)
Hey monkeys - trying to understand why a bond is trading at the price listed. Here are its key stats:
Price: 102.70 Coupon (%): 6.500 Maturity Date: 15-Jan-2012 YTM (%): -14.842 Current Yield (%): 6.329 First Coupon Date: 15-Jul-2002
Dated Date: 11-Jan-2002
I understand that the security only has one bond remaining from now until maturity, and that you discount the coupon ($32.50 because of semi-annual payments) in addition to discounting its face value (assuming $1,000?). I used a discount rate of -7.421%, because that is the YTM cut in half, to attribute for semi-annual payments.
When I sum the PVs, I obtain an amount of $1,052.597. However, the price given would be $1,027.0 (assuming I'm reading the above price correctly). What am I missing?
Thank you for your help!
Are you trying to value it as of today? Because if so you're date must be wrong - maturity date Jan 15, 2012 - that has already happened. Do you mean Jan 15, 2013?
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.
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)
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…
[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.
Oh - this is a stale quote. Look at the settlement date - December 1, 2011. That is the last time the bond was traded.
Oh got it, that makes sense. No wonder the YTM was off. Thank you so much, Boothorbust! If I had any SB's I would certainly send them your way.
Absolutely, thank you as well, SirTradesaLot.
How to price a bond if given the balance sheet of a company? (Originally Posted: 01/20/2013)
I was speaking to a restructuring analyst and he said I might get asked this in interviews.
Any suggestions as how to do it?
Thanks!
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.
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?
Bond Pricing concepts (Originally Posted: 10/28/2010)
I am going to use a very specific example here , so bear with me. Today I got asked by manager "What do you think about the pricing guidance issued today to the market by LUKOIL at 6.25 for their upcoming 10 year USD Eurobond%?"
Now I had to build an argument without the use of fundementals here , so what I did is :
1- Looked at the current curve of the outstanding LUKOIL bonds and their spreads over midswaps 2- looked at the comparable russian oil companies (TNK, Gazprom, etc.) with comparable tenors and their spreads 3- looked at the outstanding russian sovereign curve and its delta with the comparables as well as the upcoming Lukoil issue 4- Comparables ownership structure (many of those russian companies are sometimes partly / fully gov. owned) and their credit ratings. 5- looked at the new issues that came out during the past 2 months from the region and their spreads over midswaps
These things investigated , I concluded that the company is definitely looking to price within its curve and even still i think it wanna price within the TNK 2020s bond, giving the issuer a very good deal for its money.
Then he asked me "why would an investor buy such a bond then given that its pricing so tightly to the LUKOIL 2019s (issued 2009) bonds"..........my mind just blanked all of a sudden, I did not know what to say . Why would an investor buy a bond that is pricing so tightly to an already outstanding bond that is giving him the same yield. After a while I said that as an investor why would i pay around 108 for the 2019s when i can pay par for the new one......he said its a valid argument.
Now that is where I want some monkeys opinions about :
1) What do you think about the line of thought I followed in commenting about the pricing guidance ? 2) Why would an investor buy the 2020s instead of the 2019 (giving a reason other than the one I mentioned above)
Cheers
go to PIMCO site, they have it all covered.
I was looking over their website but failed to find a piece about this, care to share the website ?
on the run liquidity? dunno...
Are the bonds pari? If not, then there's your answer. 2019's trading at 108 with the same coupon are probably Sr secured
Any more takes on this ?
thaThrilla, good point, we ll see what this new issuance be though....
its not the same coupon, just a similar yield. they are both snr unsecured tho
Do you work in fixed income or IB or somewhere else?
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
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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