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 Definitions Bond Par value (face value) Coupon rate Coupon payment Maturity date Yield or Yield to maturity
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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
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 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
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 BUAD 215 600 700 800 900 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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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
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This note was uploaded on 04/15/2009 for the course FINANCE FIN 320 taught by Professor Cpirinski during the Spring '09 term at CSU Fullerton.

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

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