Execution, Validity, and Clearing Instructions
The bid prices represent the price at which dealers are prepared to buy, while the ask prices, or offer prices, indicate the prices at which they are willing to sell. Ask prices consistently exceed bid prices. Dealers also specify the…
Market Value vs. Intrinsic Value
The market value is the price at which an asset can currently be bought or sold. The intrinsic value/fundamental value is the value placed on it by investors if they had a complete understanding of the asset’s investment characteristics. In…
A Bond’s Price Given a Market Discount Rate
Bond pricing is the application of discounted cash flow analysis. The general approach to bond valuation is to utilize a series of spot rates to reflect the timing of future cash flows. Bond Pricing With a Market Discount Rate For…
Relationships Among a Bond’s Price, Coupon Rate, Maturity, and Market Discount Rate
Price versus Market Discount Rate (Yield-to-maturity) The price of a fixed-rate bond will fluctuate whenever the market discount rate changes. This relationship could be summarized as follows: when the market discount rate increases, the bond’s price decreases (inverse effect); when the…
Flat Price, Accrued Interest, and Full Price of a Bond
When investors purchase shares, they pay the quoted price. However, for bonds, there can be a difference between the quoted price and the price paid. Full Price When a bond is between coupon payment dates, the price has 2 components:…
Matrix Pricing
When fixed-rate bonds are not actively traded, or there is no market price to calculate the rate of return required by investors, it is common practice to estimate the market discount rate and price based on quoted or flat prices…
Measures for Fixed-Rate Bonds and Floating-Rate Notes
Yield Measures for Fixed-rate Bonds Fixed-rate bonds are those that pay the same amount of interest throughout their specified term. Measurement for fixed-rate bonds depends on the timing of the bond’s cash flows. The following are the measures of fixed-rate…
Spot Curve, Yield Curve on Coupon Bonds, Par Curve, and Forward Curve
Yields-to-maturity for zero-coupon government bonds could be analyzed for a full range of maturities called the government bond spot curve (or zero curve). Government spot rates are assumed to be risk-free. Spot Curve The spot curve is upward sloping and…
Voting Rights and Ownership Characteristics
In addition to issuing common or preference shares, companies can also issue different classes of these shares to further tailor the securities to the needs of the company and its investors. Common Shares Voting rights: Different classes of common shares…
