Lecture07

Lecture07 - Interest Rates and Bond Valuation 1 Agenda...

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1 Interest Rates and Bond Valuation

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2 Agenda Bonds vs Equity Bond Valuation Bond Features Duration and Interest Rate Risk Bond Ratings
3 Differences Between Debt and Equity Debt Not an ownership interest Creditors do not have voting rights Interest is considered a cost of doing business and is tax deductible Creditors have legal recourse if interest or principal payments are missed Excess debt can lead to financial distress and bankruptcy Equity Ownership interest Common stockholders vote for the board of directors and other issues Dividends are not considered a cost of doing business and are not tax deductible Dividends are not a liability of the firm and stockholders have no legal recourse if dividends are not paid An all equity firm can not go bankrupt merely due to debt since it has no debt

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4 Bond Characteristics Par Value Coupon Rate Coupon Maturity
5 Cash Flows and Bond Value Bond Value = PV of coupons + PV of par = PV of annuity + PV of lump sum Yield to Maturity (YTM) is the discount rate that sets the bond value equal to the market price.

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6 Valuing a Bond Consider a bond with a coupon rate of 10% and annual coupons. The par value is \$1,000 and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond? Using the formula:
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This note was uploaded on 03/13/2009 for the course BUAD FINANCE taught by Professor Selvili during the Fall '08 term at USC.

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Lecture07 - Interest Rates and Bond Valuation 1 Agenda...

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