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Chapter05BondValuation

# Chapter05BondValuation - OEM 2009 Program Bond Issuers...

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OEM 2009 Program Bonds and Their Valuation Page 1 CHAPTER 5 Bonds and Their Valuation Bond Issuers Treasury bonds Corporate bonds Municipal bonds Foreign bonds Bonds Types First mortgage bonds Second mortgage bonds Debentures Subordinated debentures Zero coupon bonds Income bonds Convertible bonds Bonds: Terminology Bond Par value Maturity Coupon interest rate Coupon payment Bond rating Call provision Sinking fund Bond Symbols I = Interest M = Maturity value N = Number of periods N = Number of periods V B = Value of the bond r D = Required / discount / YTM rate Bond Cash Flows 0 1 2 N V CF 1 CF 2 CF N r = i Per PV = + + … + CF 1 CF 2 CF N (1+ r) 1 (1+ r) 2 (1+ r) N

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OEM 2009 Program Bonds and Their Valuation Page 2 Bond Cash Flows 0 1 2 N V Coupon Coupon Coupon Mat rit r = i Per = r D /2 Maturity PV = + +…+ + Coupon Coupon Coupon Maturity (1+ r) 1 (1+ r) 2 (1+ r) N (1+ r) N Bond Valuation There is an inverse relationship between the required rate and the price of the bond. r D > Coupon rate V < \$1,000 r D = Coupon rate V = \$1,000 r D < Coupon rate V > \$1,000 Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 r D = 12% V < \$1 000 12% V < \$1,000 V = [\$50][PVIFA 6%,10 ] + [\$1,000][PVIF 6%,10 ] V = \$368.00 + \$558.40 = \$926.40 Inputs 10 6 50 1,000 N I/YR PV PMT FV Calculation Using the 10B Clear All Outputs -926.40 Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 r D = 10% V = \$1 000 10% V \$1,000 V = [\$50][PVIFA 5%,10 ] + [\$1,000][PVIF 5%,10 ] V = \$386.09 + \$613.91 = \$1,000.00 Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 r D = 8% V > \$1 000 8% V > \$1,000 V = [\$50][PVIFA 4%,10 ] + [\$1,000][PVIF 4%,10 ] V = \$405.54 + \$675.56 = \$1,081.11