Chapter_05-APK-Bond

Chapter_05-APK-Bond - 7-17-1CHAPTER 5Bonds ValuationnWhat...

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Unformatted text preview: 7-17-1CHAPTER 5Bonds ValuationnWhat is bond?nBond MarketsnTypes of BondnBond FeaturesnBond ValuationnYield to Maturity (YTM)7-27-2What is a bond?nA long-term debt instrument, in which a borrower agrees to make payments of principal & interest, on specific dates, to the bondholders.nA legal promissory notes that matureson the last day of its term.7-37-3Bond MarketsnPrimarily traded in the over-the-counter (OTC) market.nDebt financing cost is much cheaper than equity financing.nCoupon payment is tax-deductible.nMost bonds are owned by and traded 7-47-44 MAIN TYPES OF BOND1)Treasury bonds / Treasuries- issued by govt. , no default risk2)Corporate bonds- issued by corporations, exposed to default risk3)Municipal bonds / munis- issued by state & local govt., exposed to some default risk.4) Foreign bonds7-57-5Bond FeaturesnPar value - face value of a bond, paid at maturity (usually $1,000).- represents the amount of money the firm borrows & promises to repay on the maturity date.nCoupon interest rate - stated annual interest rate (generally fixed) paid by the issuer. - Coupon payment = Coupon interest rate X Par value. 7-67-6nMaturity date - years until the bond must be repaid.nCall provision- A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.- Borrowers are willing to pay more & lenders require more, Callable bonds .7-77-7nIssue date - when the bond was issued.nYield to maturity (YTM) - rate of return earned on a bond held until maturity (also called the promised yield).nTerm (t)- time period of the bond.nSinking fund- A provision in a bond contract that requires the 7-87-8OTHER TYPES OF BONDnConvertible bond - exchangeable for common stock of the firm, at the holders option....
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Chapter_05-APK-Bond - 7-17-1CHAPTER 5Bonds ValuationnWhat...

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