Chapter 6 Addendum - Chapter 6 Addendum Determinants of a...

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Chapter 6 Addendum Determinants of a Bond’s  Yields and Coupon Rate 1
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How is the coupon and YTM of a bond  determined? First look at the day the new bond is issued: A company wants to borrow.  Here’s it’s the B-S : 2
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Selling bonds means increasing Long-Term  Debt from $408 in 2007 to $454 in 2008.   The company sold (or issued) $46m in bonds during 2008: 3
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So what are the bond’s rates (YTM and  Coupon)? First the company exams the market to determine  the rates demanded from similar borrowers Looks at bonds with the same bond rating as the company  Or the expected bond rating Next the company calculates the YTM (demanded  by the market) on bonds issued by similar  companies What determines the YTM’s demanded by the market? We’ll get to that in a minute Now the company knows what it will have to pay to  borrow money By custom, the bonds are issued at par So the company sets the coupon rate on the bonds it will  issue to the market-determined YTM 4
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  • Spring '08
  • TOMNELSON
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