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Understanding Bonds for HADM 2222

Understanding Bonds for HADM 2222 - Prepared from the...

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Unformatted text preview: Prepared from the Prelim Exam Review on September 20, 2009 Understanding Bonds for HADM 2222 Quick Information Sheet Some Basic Concepts What is a coupon rate? o A coupon rate is the percentage of the future value of the bond paid per period. o The bond purveyor determines the coupon rate competitive to the market. What is a bond's yield-to-maturity? o A bond's yield-to-maturity is essentially the required rate of return for bonds, only for non-callable bonds. For callable bonds, the above statement doesn't apply due to the term adjustment possible when the bond is called by the bond purveyor (seller). o Yield-to-maturity with market information that changes regularly due to financial institutions' viability and the availability of credit to the general public and corporations alike. Callable v. Non-Callable o Callable: bond can be purchased back by the purveyor before the bond matures o Non-callable: bond must live to maturity Discounts, Premium, and At Par o : o : o : For Bond Calculations For all bond calculations, unless otherwise stated, the FUTURE VALE is $1,000 The coupon rate is not input into the financial calculator o Rather, the coupon rate refers to a % of the FUTURE VALUE Ex. 7% coupon rate: 0.07 $1,000 $70 $70 is your PAYMENT The coupon is the periodic payment associated with a bond The Yield-to-Maturity is your I/Y and acts similarly to when you do other TVM calculations. Discounts, Premium, and At Par o : o : o : ...
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