Chapter 7 - CHAPTER 7 Bonds and Their Valuation Key...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
    7-1 CHAPTER 7 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    7-2 What is a bond? A long-term debt instrument in which  a borrower agrees to make payments  of principal and interest, on specific  dates, to the holders of the bond.
Background image of page 2
    7-3 Key Features of a Bond Par value – face amount of the bond, which  is paid at maturity (assume $1,000). Coupon interest rate – stated interest rate  (generally fixed) paid by the issuer.  Multiply by par  value to get dollar payment of interest. Maturity date – years until the bond must be repaid. Issue date – when the bond was issued. Yield to maturity - rate of return earned on  a bond held until maturity (also called the “promised  yield”).
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    7-4 What is the opportunity cost of debt  capital? The discount rate (r ) is the  opportunity cost of capital, and is the  rate that could be earned on  alternative investments of equal risk. r i  = r* + IP + MRP + DRP + LP
Background image of page 4
    7-5 What is the value of a 10-year, 10%  annual coupon bond, if r d  = 10%? $1,000     V $385.54         $38.55       ...       $90.91      V (1.10) $1,000     (1.10) $100     ...     (1.10) $100     V B B 10 10 1 B = + + + = + + + = 0 1 2 n r 100 100 + 1,000 100 V B = ? ...
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
  7-6 The same company also has 10-year  bonds outstanding with the same risk but  a 13% annual coupon rate This bond has an annual coupon payment of $130.   Since the risk is the same the bond has the same  yield to maturity as the previous bond (10%).  In this 
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 24

Chapter 7 - CHAPTER 7 Bonds and Their Valuation Key...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online