Notes 3-5-08 (ch5 continue)

Notes 3-5-08 (ch5 continue) - (Payment Face Value(1 r)^n...

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Bus 170 Note Ch5 Bonds Continued As rate increases the price of the bond decreases As rate decreases the price of the bond increases Sell @ Bid price Buy @ Ask Price Quoted in 32nds Semiannual Payment / 2 Rate / 2 Time * 2 Monthly Payment / 12 Rate / 12 Time * 12 *********************************************************************** Current Yield (CY) = Annual Coupon payment / bond price = pmt / P0 = % CY does not measure the bond’s total rate of return. It focuses on current income Yield to Maturity (YTM) - interest rate for which the present value of the bond’s payments equals the price. Will give interest rate Also known as IRR Interest rate of return More important because this includes the face value PV(Bond) = Payment / (1+r)^1 + Payment / (1+r)^2
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Unformatted text preview: ........................ +(Payment + Face Value) / (1+r)^n PV(bond) = (PMT * PVAF) + ( Face Value * PV) Guess and check is the only way to solve it unless you have a financial calculator Rate of Return (total return) – earnings per period per dollar invested Earnings per period = total income Rate of return = total income / investment Total return = pmt + Change in bond price (% of capital appreciation/depreciation) Initial investment (P0) Change in Bond prices = P1 – P0 Or selling price – purchase price (initial investment) 5.5 Yield Curve People expect interest rates to change it directly effects the prices of the bond but the long term bond has more effect...
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