Lecture 6_Valuing Bonds I

Lecture 6_Valuing Bonds I - Session 6: Valuing Bonds I...

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Unformatted text preview: Session 6: Valuing Bonds I Financial Management 3320 Fall 2010 Indraneel Chakraborty SMU Cox School of Business Financial Management 2 A review of last class: APR and EAR APR = the annual rate that is quoted by law Period rate = APR / m EAR = the annual equivalent of the period rate From APR to EAR: From EAR to APR: 1 1 1 = + = APR m e EAR m APR EAR ( ) ( ) EAR APR m EAR APR m + = + = 1 ln 1 1 1 3 What is Finance? It is the discipline that studies the pricing of real and financial assets and the financial decisions of individuals and corporations Financial Management SMU Cox School of Business 2010 Indraneel Chakraborty 4 Roadmap of the next two classes We want to learn how to price bonds The simplest among financial assets, but also among the most ubiquitous and fascinating Federal, State, and Local authorities routinely issue bonds to finance their deficit Corporations also issue bonds to fund their investments To that purpose, we will focus on Major bond features Bond valuation Different types of bonds How bond markets work What affects bond prices: interest rates & inflation Financial Management SMU Cox School of Business 2010 Indraneel Chakraborty 5 Treasury bonds The Wall Street Journal ( www.wsj.com ) Financial Management SMU Cox School of Business 2010 Indraneel Chakraborty 6 What is a bond? A fixed-income security is a claim on a specified periodic stream of cash payments The bond is the basic fixed-income security: It is a borrowing arrangement under which the borrower agrees to make payments of interest and principal , on specific dates , to the holders of the bond Typical issuers of bonds: Federal Government: Treasury Bonds Corporations: Corporate Bonds States & Cities: Municipal Bonds Foreign Governments & Corporations: Foreign Bonds Financial Management SMU Cox School of Business 2010 Indraneel Chakraborty 7 What is a bond? Alternative (but equivalent) definition: It is a security obligating the issuer (seller) to make specific payments of interest and principal to the bondholder at specified dates , over a period of time Main features of a bond: Par value (Principal, Face value) : Amount to be repaid at the end of the loan (usually $1,000) Par value bonds : bonds selling for their face value Coupon : The interest payments the issuer promises to make to bondholders Coupon rate : annual coupon / face value Maturity date : The end of the loan Financial Management SMU Cox School of Business 2010 Indraneel Chakraborty 8 Coupon??...
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This note was uploaded on 09/20/2010 for the course FINA 3320 taught by Professor Lewis,m during the Spring '08 term at Southern Methodist.

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Lecture 6_Valuing Bonds I - Session 6: Valuing Bonds I...

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