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Lecture05

# Lecture05 - Corporate Finance Theory ECON Zhiguo He E-mail...

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1 Corporate Finance Theory ECON 360-0-30 Zhiguo He E-mail: [email protected] Office hours: Wednesday 4:00-5:00 pm Room 404, Kellogg Finance Dept 4 th Floor, Andersen Hall Course website: Blackboard http://courses.northwestern.edu/webapps/login

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2 “Just-to-Remind-You” Quiz Last Time: How are interest rates quoted and compounded ? What is the link between inflation, nominal interest rates, and real interest rates? Do you know two different ways of discounting cash flows in different currencies ? What does interest rate parity stand for?
3 Lecture 5 At a Glance Today: Bonds Yield to Maturity Term Structure of Interest Rates Bond Pricing

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4 Bonds A bond is a fixed income security that promises to pay: fixed coupon payments at a pre-specified date schedule plus a fixed principal amount (the face value) at the maturity date When there are no coupon payments then the bond is called a zero coupon bond or a pure discount bond
5 Bonds Cont’d Payments of a “N”-year bond with annual coupon C and face value F: Time: 0 1 2 ………….. N-1 N C C …………… C C+F Time: 0 1 2 ………….. N-1 N 0 0 …………… 0 F Payments of a “N”-year zero coupon bond with face value F:

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6 More on Coupon Bonds The annual coupon payments are typically stated as a percentage of the principal (or face value) If coupon payments are made m times per year, then each coupon amount is (c∙F)/m , where c is the coupon rate and F is the face value U.S. Treasury Notes and Bonds typically pay semi-annual coupons
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Lecture05 - Corporate Finance Theory ECON Zhiguo He E-mail...

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