Chapter 6 - CHAPTER 6 Valuing Bonds Topics Covered The Bond...

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CHAPTER 6 Valuing Bonds
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Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity Bond Rates and Returns The Yield Curve Corporate Bonds and the Risk of Default
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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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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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Key Features of a Bond- Terminology Bond - Security that obligates the issuer to make specified payments to the bondholder. Face Value (Par Value or Principal Value) - Payment at the maturity of the bond. Coupon - The interest payments made to the bondholder. Coupon Rate - Annual interest payment, as a percentage of face value. Maturity date - years until the bond must be repaid.
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Bonds WARNING WARNING The coupon rate IS NOT the discount rate used in the Present Value calculations . The coupon rate merely tells us what cash flow the bond will produce. The discount rate (r i ) is the opportunity cost of capital, and is the rate that could be earned on alternative investments of equal risk. r d = r* + IP + MRP + DRP + LP r*: Real risk free rate IP: Inflation premium MRP: Maturity risk DRP: Default risk premium LP: Liquidity risk
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The price of a bond is the Present Value of all cash flows generated by the bond (i.e. coupons and face value) discounted at the
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This note was uploaded on 11/09/2009 for the course SBA fin3301 taught by Professor S.koubida during the Spring '09 term at Al Akhawayn University.

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Chapter 6 - CHAPTER 6 Valuing Bonds Topics Covered The Bond...

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