examfina - Investor's rate of return= Coupon rate at the...

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Investor’s rate of return = Coupon rate at the time the bond is sold by the firm to investors. As the time passes by, this rate (also called ytm, discount rate etc) will keep changing Goes into the I/Y key in the calculator. Price of Bond = PV (coupon payments)+PV(Face or Par value, $1000) General Valuation Model : The value of any asset can be found as the present value of its expected future cash flows, CF, discounted at the rate k V=CF1/(1+k)^2 + CFn(1+k)^n The discount rate depends on 1. The risky ness of the cash flows, which reflect default risk maturity(interest rate) risk and liquidity. 2. The general level of interest rates , which reflects inflation supply of and demand for money, production opportunities and time preferences for consumption. Call Feature - Treasury bonds are not callable generally. Corporate and municipal bonds can have call features. Not an attractive feature for investor but Golden rule works here. Bond Tables: Current yield (what you are making approximately % of return on interest of bond = annual coupon payment/price of bond. Prices on bond tables are percents of 1000. Basic Bond investment issues: Inverse relationship between bonds and I rates. I goes up, bond prices drop. Long term bond prices more sensitive than short term bond prices when interest rates change. Low coupon bond prices are more sensitive than high coupon bond prices when Interest rates change. Bonds with short maturity don’t have a higher rate of return. Current Yield = Annual coupon rate/ price When ytm = coupon price is 1000 and c.g. is 0. PMT when you only have coupon and ytm is coupon/ytm. As interest rates (kd) fluctuates more than the price of the higher coupon bond. 1. Most volative (price movements) of all bonds: long term (30+year, zero coupon bonds 2. Least volatile bond: short term, high coupon rate. Only if your bought a zero coupon bond do you realize the yield at which you bought the bond. Zero coupon Bonds- n o coupon payments ever. Way to get out of having to reinvest interest check, nothing to reinvest. Everyone sells these, us gove, municipalities -> Tax free zeros. . You pay a deep discounted price today and get face value at maturity. IRS says in a taxable account: take the difference between 1000 and the PV then divide that by 30 and you get the taxable interest every yr. But if done in a IRA or tac deferred account: no prob. No reinvestment of coupon to be done here. Convertible Bond-
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examfina - Investor's rate of return= Coupon rate at the...

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