IF Bond Valuation - Lecture

# IF Bond Valuation - Lecture - Bo Valuatio nd n...

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Click to edit Master subtitle style  Chapter 7   ©  2003-2009 Mehmet Yalin Bond Valuation

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Chapter 7   ©  2003-2009 Mehmet Yalin Chapter 7 Interest Rates and Bond Valuation 22
Chapter 7   ©  2003-2009 Mehmet Yalin basic concepts v Bond : Security that promises specified payments over a specified period of time - Face (par) value : Principal amount of a bond - Coupon : Interest payment of a bond - Coupon rate : Annual coupon divided by face value - Maturity : Date at which the principal is paid - Yield to maturity ( YTM ) : Annual return required of the bond 33 ( 29 ( 29 ( 29 ( 29 value Face Coupons 1 1 1 1 PV t PV t YTM F YTM YTM C PV + + + - × =

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Chapter 7   ©  2003-2009 Mehmet Yalin example 1 on bond pricing How much maximum would you be willing to pay for a 30-year bond with a face value of \$1,000 and a coupon rate of 8% with annual coupon payments if the yield to maturity ( YTM ) of such bonds in the market is 8%? 44 ( 29 ( 29 000 , 1 \$ 08 . 0 1 000 , 1 \$ 08 . 0 1 1 1 08 . 0 80 \$ 38 . 99 \$ 30 62 . 900 \$ 30 = + + + - × = PV PAR BOND:     YTM = Coupon rate 4 Price = Face value
Chapter 7   ©  2003-2009 Mehmet Yalin example 1 on bond pricing (cont’d) How about if the YTM on the previous slide is 10%? How about if the YTM on the previous slide is 6%? 55 ( 29 ( 29 46 . 811 \$ 1 . 0 1 000 , 1 \$ 1 . 0 1 1 1 1 . 0 80 \$ 30 30 = + + + - × = PV DISCOUNT BOND:     YTM > Coupon rate   Price < Face value ( 29 ( 29 30 . 275 , 1 \$ 06 . 0 1 000 , 1 \$ 06 . 0 1 1 1 06 . 0 80 \$ 30 30 = + + + - × = PV PREMIUM BOND:     YTM < Coupon rate   Price > Face value

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Chapter 7   ©  2003-2009 Mehmet Yalin example 2 on bond pricing A company is planning to issue a 20-year bond with a face value of \$1,000 and a coupon rate of 6% with semiannual coupon payments. What will be the price of the bond if the yield to maturity ( YTM ) of the bond is expected to be 8%? 66 ( 29 ( 29 07 . 802 \$ 04 . 0 1 000 , 1 \$ 04 . 0 1 1 1 04 . 0 30 \$ 40 2 20 % 4 2 08 . 0 30 \$ 2 06 . 0 000 , 1 \$ 40 40 = + + + - × = = × = = = = × = PV t R C S S
©  2003-2009 Mehmet Yalin example on pure discount bond Calculate the current price and annual implicit interest for a 4-year zero coupon bond with a face value of \$1,000 if the yield to maturity ( YTM ) of the bond is 7%?

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