Chapter 07 w Learning Obj

Chapter 07 w Learning Obj - Chapter 7 Bonds and Their...

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    7-1 Chapter 7 - Bonds and Their Valuation Learning Objectives After reading this chapter, students should be able to: List the four main classifications of bonds and differentiate among them. Identify the key characteristics common to all bonds. Calculate the value of a bond with annual or semiannual interest payments. Calculate the yield to maturity, the yield to call, and the current yield on a bond. Explain why the market value of an outstanding fixed-rate bond will fall when  interest rates rise on new bonds of equal risk, or vice versa. Differentiate between interest rate risk, reinvestment rate risk, and default risk. List major types of corporate bonds and distinguish among them. Explain the importance of bond ratings and list some of the criteria used to rate  bonds. Differentiate among the following terms:  Insolvent, liquidation, and  reorganization. Read and understand the information provided on the bond market page of your  newspaper.
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    7-2 CHAPTER 7 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk
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    7-3 What is a bond? A long-term debt instrument in which  a borrower agrees to make payments  of principal and interest, on specific  dates, to the holders of the bond.
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    7-4 Bond markets Primarily traded in the over-the-counter  (OTC) market. Most bonds are owned by and traded among  large financial institutions. Full information on bond trades in the OTC  market is not published, but a representative  group of bonds is listed and traded on the  bond division of the NYSE.
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    7-5 Key Features of a Bond Par value – face amount of the bond, which  is paid at maturity (assume $1,000). Coupon interest rate – stated interest rate  (generally fixed) paid by the issuer.  Multiply by par  value to get dollar payment of interest. Maturity date – years until the bond must be repaid. Issue date – when the bond was issued. Yield to maturity - rate of return earned on  a bond held until maturity (also called the “promised  yield”).
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    7-6 Effect of a call provision Allows issuer to refund the bond issue  if rates decline (helps the issuer, but  hurts the investor). Borrowers are willing to pay more,  and lenders require more, for callable  bonds. Most bonds have a deferred call and  a declining call premium.
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    7-7 What is a sinking fund? Provision to pay off a loan over its life 
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This note was uploaded on 07/18/2009 for the course FIN 3331 taught by Professor Nowacki during the Spring '09 term at Troy.

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Chapter 07 w Learning Obj - Chapter 7 Bonds and Their...

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