ch7 - 1. Features of a bond: A. Par value face amount of...

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1. Features of a bond: A. Par value – face amount of the bond which is paid at maturity B. Coupon interest rate – stated interest rate (generally fixed) paid by the issuer. Coupon interest rate × par value = interest payment C. Maturity date – years until the bond must be repaid D. Issue date – when the bond was issued E. Yield to maturity (YTM) – rate of return earned on a bond held to maturity; also called the “Promised Yield”. YTM = current yield + capital gains yield (a) Equals the expected rate of return ONLY if (1) the probability of default is 0, and (2) the bond cannot be called Expected total return = YTM = (expected CY) + (expected CGY) F. Discount bond – sells below par; market interest rate is greater than the coupon rate G. Premium bond – sells above par; market interest rate is less than the coupon rate H. Current yield – does not represent the total return investors expect to receive because it doesn’t take into account capital gain/loss that will be realized if the bond is held to its maturity (or call) Current yield (CY) = Annual coupon payment/current price I. Capital gains yield (CGY) = change in price/beginning
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This note was uploaded on 06/09/2009 for the course FIN 310 taught by Professor Caples during the Spring '09 term at McNeese.

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ch7 - 1. Features of a bond: A. Par value face amount of...

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