chapter 5 - COPYRIGHTZHULI 1 Chapter 5 Valuing bonds...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: COPYRIGHTZHULI 1 Chapter 5 Valuing bonds COPYRIGHTZHULI 2 Objectives 1. Distinguish among a bonds coupon rate, current yield, and yield to maturity 2. Find the market price of a bond given its yield to maturity, find a bonds yield given its price, and demonstrate why prices and yields vary inversely 3. Show why bonds exhibit interest rate risk 4. Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings COPYRIGHTZHULI 3 Content Bond characteristics Interest rates and bond prices Current yield and yield to maturity Bond rates of return The yield curve Corporate bonds and the risk of default COPYRIGHTZHULI 4 Bond : security that obligates the issuer to make specified payments to the bondholder C oupon : the interest payments paid to the bondholder Face value or principal : payment at maturity of the bond. Also called par value or maturity value Coupon rate : annual interest payment as a percentage of face value COPYRIGHTZHULI 5 Consider a U.S. Treasury bond as an example. Several years ago, the U.S. Treasury raised money by selling 5.5% coupon, 2008 maturity Treasury bonds. Each bond has a face value of $1000. Suppose that in 2005 you decided to buy the 5.5% coupon bonds maturing in 2008. If you planned to hold the bond until maturity, the cash flows would be as follows: COPYRIGHTZHULI 6 Coupon payment Face value Bond prices are quoted in 32nds rather than decimals e.g. 105:32 means that the price is 105 and 23/32, or 105.719%, therefore each bond costs $1057.19 COPYRIGHTZHULI 7 Bond: a& Coupon: a& Face value or par value : a & Principal: a& Maturity value: a& & Coupon rate: a& & & COPYRIGHTZHULI 8 Content Bond characteristics Interest rates and bond prices Current yield and yield to maturity Bond rates of return The yield curve Corporate bonds and the risk of default COPYRIGHTZHULI 9 How much would you have been willing to pay for the bond? The value of a security is the present value of the cash flows it will pay to its owners....
View Full Document

This note was uploaded on 05/11/2010 for the course BUSINESS S 409 taught by Professor Terryryan during the Summer '10 term at Winthrop.

Page1 / 34

chapter 5 - COPYRIGHTZHULI 1 Chapter 5 Valuing bonds...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online