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Fin320-CH7

# Fin320-CH7 - FIN 320 Chapter#7 Valuation and...

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FIN 320 Chapter #7: Valuation and Characteristics of Bonds Christo Pirinsky

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BUAD 215 Interest Rates & Bond Valuation Definitions Bond Par value (face value) Coupon rate Coupon payment Maturity date Yield or Yield to maturity
Characteristics of Bonds Bonds pay fixed coupon (interest) payments at fixed intervals (usually every 6 months) and pay the par value at maturity.

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BUAD 215 PV of Cash Flows as Rates Change Bond Value = PV of coupons + PV of par Bond Value = PV annuity + PV of lump sum Remember, as interest rates increase the PV’s decrease So, as interest rates increase, bond prices decrease and vice versa
BUAD 215 Valuing a Discount Bond with Annual  Coupons Consider a bond with a coupon rate of 10% and coupons paid annually. The par value is \$1000 and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond? Using the formula: B = PV of annuity + PV of lump sum B = 100[1 – 1/(1.11) 5 ] / .11 + 1000 / (1.11) 5 B = 369.59 + 593.45 = 963.04 Using the calculator: N = 5; I/Y = 11; PMT = 100; FV = 1000 CPT PV = -963.04

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BUAD 215 Valuing a Premium Bond with Annual  Coupons Suppose you are looking at a bond that has a 10% annual coupon and a face value of \$1000. There are 20 years to maturity and the yield to maturity is 8%. What is the price of this bond? Using the formula: B = PV of annuity + PV of lump sum B = 100[1 – 1/(1.08)20] / .08 + 1000 / (1.08)20 B = 981.81 + 214.55 = 1196.36 Using the calculator: N = 20; I/Y = 8; PMT = 100; FV = 1000 CPT PV = -1196.36
BUAD 215 Graphical Relationship Between Price & YTM 600 700 800 900 1000 1100 1200 1300 1400 1500 0% 2% 4% 6% 8% 10% 12% 14% Bond characteristics: Coupon rate = 8% with annual coupons; Par value = \$1000; Maturity = 10 years

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BUAD 215 Bond Prices: Relationship Between Coupon &  Yield If YTM = coupon rate, then par value = bond price If YTM > coupon rate, then par value > bond price Why? Selling at a discount, called a discount bond If YTM < coupon rate, then par value < bond price Why? Selling at a premium, called a premium bond
Example:  AT&T 8  24 par value = \$1000 coupon = 8% of par value per year.

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Fin320-CH7 - FIN 320 Chapter#7 Valuation and...

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