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 VC F 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 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 = 12% V < $1 000 r D 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
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OEM 2009 Program Bonds and Their Valuation Page 3 Yield to Maturity ± A bond’s yield to maturity (YTM), also called the “promised yield”, is the rate of return which will be earned if the bond is held to maturity. Yield to Maturity ± Since bonds have a known cash flow (they are called fixed-income securities), we assume that they are always in equilibrium and that their YTM is also equal to the investors’ required rate of return. That is, expected rates are equal to required rates. Yield to Maturity ± Thus, the YTM for a bond is that discount rate which will produce a present value of cash flows equal to the current price of the bond.
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This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

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Chapter05BondValuation - OEM 2009 Program Bond Issuers...

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