EQUITIES AND FIXED INCOME INVESTMENTS

Using the discounted cash flow method in estimating the market value of the different types of bonds.
The expected cash flow for a bond consists of interest during the lifetime of the bonds plus principal payments, i.e. the face value of the bond.
Nominal price-this is the amount of money that is designated on the bonds. Typically, bonds are issued with a high enough value. The denomination is the base for all recalculations and charging interest.
Bonds issue price is the price at which the sale of bonds is their first owners. Issue price can be equal to, less than or greater than face value. It depends on the type and conditions of the bond issue.
Redemption price is the price paid bondholders at maturity of the loan. In most editions of the redemption price equal to the nominal price, but it may differ from face value.
Course price is the price at which bonds are sold on the secondary market. If each bond has a well defined nominal price, redemption price and the price of emission, which is fixed with the release of the loan, the term price changes considerably during the lifetime of the bonds-it ranges around a theoretical (or inside, or calculated) value (or price) of bonds.
The general approach to the determination of the theoretical value of any securities is the following: to determine how much should cost a security at any given time, you need to find the present value of all income, which would receive the investor during the ownership of commercial paper.
Income from bonds as an absolute indicator consists of two main components:
-periodically receive coupon per cent;
-the difference between the sales price (face value, redemption price or market price) and the price of buying bonds.
Current yield is related to current income bonds this year to commit at the time of the change in the market value of the bonds.
The current yield is generally useless when comparing the qualities of different kinds of bonds investment, since it does not take into account all the elements of a bond's cash flow, including the most significant-the nominal value, or the redemption price paid by the issuer at maturity.
Current yield is not the best indicator because it applies only to measurement of coupon bonds. Zero-coupon bonds have a current yield of zero (except for the last before redemption of the year). At the same time, such bonds can be very attractive and profitable.
Most informative parameter for the assessment and analysis of investment attractiveness of bonds yield to maturity.
Yield to maturity takes into account all the elements of cash flow on bonds raised by the terms of issue. It is this figure is suitable for assessing the cost-effectiveness of investments in domestic bonds in the form of annual compound interest interest rate (effective rate) and can be used when comparing the returns of various investments in bonds and other securities.
Yield to maturity (YTM) measures the efficiency of investments in bond for investors in the form of the annual rate of interest difficult.
Yield to maturity is the discount rate at which the present value of interest payments and repayment of the bonds is equal to the purchase price of the bonds (Investor's costs).
If you know the price of bonds, the yield to maturity can be determined by the method of successive approximations.
Based on the calculated yield to maturity, you can decide on the admissibility of certain investments. If an investor has a required rate of return for this investment (risk-based) and if the rate of return on bonds is at or above the required standard, then buying bonds is a worthwhile investment.
The yield to maturity of bonds with a floating interest rate (with floating coupon) with more or less cannot be determined reliably.
This may involve only a very rough estimate based on the forecast of development of the market situation. However, it should be borne in mind that the amount of the coupon rate for the next coupon period is set based on the prevailing and expected market conditions for the next period.
An investor can hold the bond until maturity, and not sell it to maturity. In this case, you must determine the profitability over the period of ownership. Calculate bond yield virtually no different from the methods of calculating the yield to maturity. The only difference is that the investor receives not the amount maturity (nominal bond) and the selling price of bonds, which may differ from face value.
Particular attention should be given to such factors, which influence the cost of risk.
The risk is the uncertainty of the future. In our case, from the point of view of possible losses for the future market price of a security is not known, but it is sure to be profitable for some participants and loss (loss) for the other. As for the market the greatest danger is precisely the possibility of loss, it should always take into account the risks associated with commercial paper.
The risk of external-independent direct from stock market (inflation, competition, political and economic crises).
An internal risk-capital market development (level of economic solvency of the issuer, the ratio of supply and demand).
Issuer risk-the risk of nedorazmeŝeniâ securities, risks connected with the payment of a security.
The risk owner (Investor)-risk of non-receipt of income risk-return of the par value of bonds (liquidation value of shares), etc.
A special place in the classification of risks are objective and subjective risks of the securities.
Objective risks are risks related to fluctuations of stock indices, fluctuations in securities due to the increase or decrease of investment appeal.
Subjective-relating to the activities of the issuer and its contractors.
Significant impact on the value of the securities also have expenses (costs) related to the production, use, handling, change of owner of securities.
To account for the risk on practice using two groups the most simple methods:
1) accounting methods of risk based on the increase in the discount rate, namely: pofaktornyy method and aggregate method;
2) accounting methods of risk, based on a decrease in income.
1. the accounting methods of risk based on the increase in the discount rate. The essence of the method in the following code. In the main computational formula of the income approach to increase the size of the denominator, i.e. calculate so-called price risk (risk premium) that reduces income, which means the price of securities. As the estimated value of the discount rate is the interest rate used to calculate future income streams into a single value current value to determine the market value.
When applying this method, the discount rate is the amount of risk-free rates and risk premiums.
The discount rate is related to the expected investment risk. The concept of risk suggests that all investments are located in between the full confidence of their return (zero risk) and complete uncertainty about their payback (infinite risk). In considering the two investment opportunities promising equal expected returns in money terms, an investor generally prefers investments with the lowest degree of risk or, conversely, is counting on a higher return on investment with a higher degree of risk.
The aggregate method. Choice of discount rate depends on the type of cash flow used to gauge.
The cost of financing investment in the company through equity (equity value) reflects all risks inherent in investments in equity, while the cost of debt financing is reflected in the interest rate at which the company provides loans.
The yield on zero-coupon bonds.
Income on bonds with a coupon of zero represents the difference between the nominal value and the acquisition price of the paper.
Yield curve – this is the main indicator that watching traders in bonds and bond portfolios. It is a chart of returns of bonds with the same risk (for example, sovereign), built according to the date of maturity.
Typically, bonds with longer maturities are considered more risky, as the distant future is more uncertainty. Because the yields on them, that is, the required risk fee tends to be higher than for bonds with a similar maturity. Accordingly the yield curve usually tilted up.
Each agency assigns ratings to bonds on its own system, based on an in-depth analysis of the financial situation of the issuer, quality management, economic factors and specific sources of income, guaranteeing payments on bonds. The highest ratings are "AAA" (S & P and Fitch) and Aaa (Moody 's). Bonds rated "BBB" or higher is considered investment grade bonds; bonds with a rating of category "C" or below are considered high-yielding bonds, or bonds below investment grade.
The promised yield to maturity (%) – 4,9
The real yield to maturity (%) – 5,0
Bibliography
Attilio Meucci, P versus Q: Differences and Commonalities between the Two Areas of Quantitative Finance, GARP Risk Professional, February 2011, pp. 41-44
Brian Kettell, "Economics for Financial Markets (Quantitative Finance)"
Meucci, Attilio (2005). Risk and Asset Allocation. Springer.
Siegel, J. and Shim, J. (1997). "Schaum's Quick Guide to Business Formulas", New York, NY: McGraw-Hill.
William Sharpe, Investments, Prentice-Hall, 1985
Brian Kettell, "Economics for Financial Markets (Quantitative Finance)"; Quantitative Analysis In Financial Markets
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