FIN301_Ch6

FIN301_Ch6 - Chapter 6 Interest Rates and Bond Valuation...

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Chapter 6 Interest Rates and Bond Valuation
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2 Chapter Outline Bonds and Bond Valuation Bond Classifications Bond Ratings Inflation and Interest Rates
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3 Bond Definitions Bond Par value (face value) Coupon rate Coupon payment Maturity date Yield or Yield to maturity
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4 PV of Cash Flows as Rates Change Bond Value = PV of coupons + PV of par t r) (1 F r t r) (1 1 - 1 C Value Bond + + + =
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5 Valuing a Bond  1. Consider a bond with a coupon rate of 10% and coupons paid annually. 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? 2. Consider a bond with a coupon rate of 8% and coupons paid semi-annually. The par value is $1,000 and the bond has 10 years to maturity. The yield to maturity is 10%. What is the value of the bond? 3. Suppose you are looking at a bond that has a 8% annual coupon and a face value of $1,000. There are 20 years to maturity and the yield to maturity is 6%. What is the price of this bond? 4. Suppose you are looking at a bond that has a 8% annual coupon and a face value of $1,000. Coupons are paid quarterly. There are 15 years to maturity and the yield to maturity is 6%. What is the price of this bond?
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6 Graphical Relationship Between Price and  YTM (10-year 8% Annual Coupon Bonds) 600 700 800 900 1000 1100 1200 1300 1400 1500 0% 2% 4% 6% 8% 10% 12% 14%
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7 Bond Prices: Relationship  Between Coupon and Yield If YTM = coupon rate, then par value = bond price
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FIN301_Ch6 - Chapter 6 Interest Rates and Bond Valuation...

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