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