chapter6a - Chapter 6 Bond Valuation Issues: How to Value...

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Chapter 6 Bond Valuation Issues: How to Value Bond Interest rate risk and Default Risk Effects of inflation on interest rates
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2 Bond Definitions Par value (face value): The principal amount of a bond that is repaid at the end of the term Coupon rate: The annual coupon divided by the face value of a bond Coupon payment: Stated interest payment made on a bond Maturity date: Date on which the principal amount of a bond is paid Yield or Yield to maturity: The rate required in the market on a bond
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Valuing Pure Discount Bonds Pure Discount Bonds: Promise to pay a single cash payoff at some maturity date Key parameters: Time to maturity ( T ) = maturity date - today’s date Face value ( F ) Discount rate ( r ) Present value of a pure discount bond at time 0: T r F PV ) 1 ( + = 0 0 $ 1 0 $ 2 0 $ 1 - T F $ T
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Example of a pure discount bond Find the value of a 30-year zero-coupon bond with a $1,000 par (face) value. The appropriate discount rate is 6%. 11 . 174 $ 30 ) 06 . 1 ( 000 , 1 $ ) 1 ( = = + = T r F PV 0 0 $ 1 0 $ 2 0 $ 29 000 , 1 $ 30
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Valuing Level-Coupon Bonds Level-Coupon Bonds: Promise of a regular coupon payment each period plus face value (i.e., principal) repayment at maturity Key parameters: Coupon payment dates and amounts (C)
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chapter6a - Chapter 6 Bond Valuation Issues: How to Value...

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