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BUS2020F+-+Bonds+L1

BUS2020F+-+Bonds+L1 - BONDS MichaelVermeulen LC5.29...

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Click to edit Master subtitle style  4/7/10 BONDS Michael Vermeulen  LC 5.29
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 4/7/10 Know the important features of bonds Know how to calculate the value of a coupon bond  and a zero-coupon bond Understand bond ratings and what they mean A basic understanding of term structure of interest  rates Learning Objectives
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 4/7/10 A Bond Defined a bond is a debt security, in which the authorized  issuer owes the holders a debt and, depending on  the terms of the bond, is obliged to pay interest  ( the coupon ) and/or to repay the  principal  at a  later date, termed  maturity . A bond is a formal  contract to repay borrowed money with interest at  fixed intervals. 3
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 4/7/10 Important Varibles The  par value  (face value or principal) of a bond  is the amount that the bond issuer agrees to repay  the bondholder at or by the maturity date. The  coupon rate  is the fixed interest rate the  issuer agrees to pay each year. The coupon is  calculated as follows: Coupon = Coupon Rate x Face Value
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 4/7/10 The term to maturity of a bond is the number of  years the debt is outstanding or the number of  years remaining to final principal payment. Important Variables cont.
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 4/7/10 Bond Valuation General Valuation Model: Coupon Bonds Where ‘r’ is the current market rate of interest (or  6 Obj100 = + + + = t t B V 1 t t r) (1 Value Nominal r) (1 Coupon
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