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Unformatted text preview: Chapter 6 Bonds Introduction (section 6.1) When a corporation or government needs a large sum of money for a long period of time, they can issue bonds the bonds can be sold to a large number of investors A bond is a written contract between the issuer (borrower) and the investor (lender) that specifies: 1. Face Value of the Bond this is the amount that is stated on the face of the bond stated in units of $100 2. Redemption Date the date on which the bond will be repaid 3. Bond Rate the rate at which the bond pays interest on its face value Other Definitions 4. Redemption Value this is the amount of money to be repaid on the redemption date 5. Redeemed at Par most times, the redemption value is equal to the face value in these cases, the bond is said to be redeemed at par for bonds redeemed at other that par, the redemption value is stated in units of $100 6. Yield Rate bonds may be sold from one investor to another at any time the buyer of the bond will wish to realize a certain rate of return (and this rate will frequently differ from the bond rate) this desired rate of return is specified by the yield rate The yield rate will vary with the financial climate and it will affect the price at which bonds are traded Notation F = face value of the bond C = redemption value of the bond r = bond rate per interest period i = yield rate per interest period n = number of interest periods until the redemption date Fr = bond interest payment (or coupon) P = purchase price of the bond to yield i Two Fundamental Problems 1. Given i , determine P 2. Given P , determine i Purchase Price to Yield a Given Rate of Return (section 6.2) A buyer of a bond receives: This leads to the basic purchase price formula: P = Fr i n a  + C (1 + i ) n Alternative Formula (premium/discount formula) Example 6.2.1Example 6....
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This note was uploaded on 04/14/2010 for the course ACSCI 2053 taught by Professor Kopp during the Spring '09 term at UWO.
 Spring '09
 Kopp

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