1.9 Stud%20Week%204%20Lect%202%20Bond%20Valuation%20Part%202.ppt

# 1.9 Stud%20Week%204%20Lect%202%20Bond%20Valuation%20Part%202.ppt

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Bond Valuation Week 4 Lecture 2

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Basic Valuation From the time value of money we realize that the  value of anything is based on the present value  of the cash flows the asset is expected to  produce in the future
The value of financial assets n n 2 2 1 1 r) (1 CF     ...     r) (1 CF     r) (1 CF     Value + + + + + + = 0 1 2 n r% CF 1 CF n CF 2 Value ... CF t  = the cash flow expected to be generated by  the asset in period t

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r = the return investors consider appropriate  for holding such an asset - usually referred to  as the required return The return should reflect the opportunity cost  of capital Basic Valuation
Bond Pricing - 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 required rate  of return.                          PV cpn r cpn r cpn par r t = + + + + + + + ( ) ( ) .... ( ) ( ) 1 1 1 1 2 1 1 (1 ) (1 ) t N d d d d M PV Int r r r r         = - + + +

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Today’s Plan Yields Total Bond Yield Current Yield Yield to Maturity Yield to Call Reading Financial Pages
Bond Yields Rate of Return  - Earnings per period per dollar  invested. total income Rate of return= investment Rate of return= Rate of return=

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Bond Yields Current yield  is the annual interest      payment on a  bond divided by  its current market value
Bond Yields Capital gains yield  is the difference between the bond price at the  end of the period and the bond price at the beginning of the period  divided by  the bond’s current market value

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Bond Yields Rate of Return  - Earnings per period per dollar  invested. total income Rate of return= investment Coupon income price change Rate of return= investment investment Rate of return=Current Yield + Capital Gains Yield +
Bond Pricing –Remember The  price of a bond is the ____________ _______________________________  (i.e.  coupons and face value) discounted at the  ______________ (________ determined

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## This note was uploaded on 12/23/2009 for the course BCOM FINC 201 taught by Professor Debrak.reed during the Spring '09 term at Canterbury.

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1.9 Stud%20Week%204%20Lect%202%20Bond%20Valuation%20Part%202.ppt

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