Lecture 12 0306 - ORIE 350 March 6 2007 Bond Review Leases...

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    ORIE 350 March 6, 2007 Bond Review Leases
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    Review of the Bond Basics A bond has four parameters that are predetermined and stated at the time of issue: 1. Face value – the dollar amount the debtor must pay the creditor upon maturity. 2. Face interest rate – used to calculate the amount of cash interest that must be paid to the creditor semi- annually. 3. Term – the stated time that elapses between issuance and maturity. 4. Payment dates – the dates on which interest is paid.
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    Review of the Bond Basics A bond has one parameter that is not predetermined but is negotiated at the time of issue: 1. Price – the dollar amount the creditor pays the debtor upon issuance. The price is almost always between 95% and 105% of the face value. The price is set by market forces on the day of issuance.
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    The Bond Equation We can find the price today of a bond, PV, by determining the sum of the present value of the two payments: 1. The semi-annual coupon payments, A. 2. The repayment of the principle at maturity, FV. n n ) i 1 ( FV i ) i 1 ( 1 A PV + + + - = -
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    The Bond Equation 2 2 ) 1 ( ) 1 ( 1 yield i n n where i FV i i A PV y n n = = + + + - = -
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    Parameter Conversion 1. The term is given in years, as n y . We must
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