1
Bond Valuation & Interest Rates
±
Bond
²
Bond valuation
²
Bond features and types
Prof. Q. Ma
HADM 2222: Bond Valuation
1
²
Bond market
±
Interest rate
Bond Example
Marriott International issues bonds to
finance its expansion into emerging markets.
From each bond issued, it borrows a face
value of $1,000 for 20 years. The coupon
Prof. Q. Ma
HADM 2222: Bond Valuation
2
rate is 10 percent. Marriott will thus pay
$100 in interest every year for 20 years. At
the end of 20 years, Marriott will repay the
$1,000. The yield to maturity for similar
bonds is quoted at 8%.
Bond Definition
±
Bond
±
Par value or face value (F)
±
Coupon rate
Prof. Q. Ma
HADM 2222: Bond Valuation
3
²
Coupon payment (C)
±
Maturity (T)
±
Yield to maturity (r)
Bond Pricing Equation
Bond Value = PV of coupons + PV of par
1
⎤
⎡
Prof. Q. Ma
HADM 2222: Bond Valuation
4
T
T
r)
(1
F
r
r)
(1

1
C
Value
Bond
+
+
⎥
⎥
⎥
⎥
⎦
⎢
⎢
⎢
⎢
⎣
+
=
Discount Bond
Consider a bond with a coupon rate of 10% and
coupons paid annually. The par value is $1000
and the bond has 20 years to maturity. The yield
to maturity is 12%. What is the value of the bond?
±
Formula
Prof. Q. Ma
HADM 2222: Bond Valuation
5
²
B = PV of annuity + PV of lump sum
²
B = 100[1 – 1/(1.12)
20
] / .12 + 1000 / (1.12)
20
±
Calculator
²
N = 20; I/Y = 12; PMT = 100; FV = 1000
²
CPT PV =
– 850.61
Premium Bond
Consider a bond with a coupon rate of 10% and
coupons paid annually. The par value is $1000
and the bond has 20 years to maturity. The yield
to maturity is 8%. What is the value of the bond?
±
Formula
Prof. Q. Ma
HADM 2222: Bond Valuation
6
²
B = PV of annuity + PV of lump sum
²
B = 100[1 – 1/(1.08)
20
] / .08 + 1000 / (1.08)
20
±
Calculator
²
N = 20; I/Y = 8; PMT = 100; FV = 1000
²
CPT PV =
– 1,196.36
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document2
Properties of Bond Price
±
Price & yield relationship
²
Everything else the same, higher yield leads to lower
bond price.
±
Coupon rate & yield relationship
²
If coupon rate = YTM, then bond price = par value
Prof. Q. Ma
HADM 2222: Bond Valuation
7
²
If coupon rate < YTM, then bond price < par value
²
If coupon rate > YTM, then bond price > par value
Bond Price & Yield
(Par=1,000, Coupon Rate=10%, T=20)
1196.36
1500
2000
2500
d Price
Prof. Q. Ma
HADM 2222: Bond Valuation
8
850.61
1000.00
0
500
1000
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
Yield
Bond
Bonds in Reality
±
In practice, bonds issued in the United States
usually make coupon payments twice a year.
This is the end of the preview.
Sign up
to
access the rest of the document.
 '07
 QMA
 Prof. Q. Ma, Prof. Q. Ma HADM

Click to edit the document details