chap006 with additions

chap006 with additions - Chapter 6 - Interest Rates and...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 6 - Interest Rates and Bond Valuation Bonds and Bond Valuation More on Bond Features Bond Ratings Some Different Types of Bonds Bond Markets Inflation and Interest Rates Term Structure of Interest Rates – “Yield Curve” Determinants of Bond Yields
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Valuing a Bond in Equilibrium Bond – a Method of Borrowing Issuers sell (usually through intermediary) fixed borrowing units with known maturity dates and yields Normally admin/sales costs called “floatation costs” Floatation costs are usually relatively small, so ignored in our calculations. For a new bond, the issuer has to decide: What interest rate yield? What are the underlying rates in the marketplace? How risky am I as a borrower? (Bond rating) What yield are other borrowers (with similar risk) paying? How do I want to structure this bond? Basics: The terms: Indenture Coupons or not? How much time until maturity? What denomination? $1000 is default. How much do we need to raise? So, how many bonds do we plan to sell?
Background image of page 2
3 Bond Definitions Par value (face value) => FV Coupon rate Coupon payment = Coupon rate x Par value => PMT Can also be “Zero Coupon” bond – No Coupon! Maturity date Knowing current date and maturity date, can find time to maturity => N Yield or Yield to maturity => I Yield to Call Informally, Yield (to whenever you sell the bond) Value of the Bond today => PV
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 PV of Cash Flows as Rates Change Value of Any Investment = PV of future cash flows Bond Value = PV of coupons + PV of par Bond Value = PV annuity + PV of lump sum Remember, as interest rates increase the PVs decrease So, as interest rates increase, bond prices decrease and vice versa
Background image of page 4
5 Valuing a New Bond - In Equilibrium We plan to issue 5-year, 10% Annual Coupon, $1000 par value bonds with a Yield to Maturity = 10% (required yield, based on our research.) What is today’s value of the bond? Coupon = Coupon Rate x Par Value = 10% x $1000 = $100/yr Using the formula: B = PV of annuity + PV of lump sum B = 100[1 – 1/( 1.10 ) 5 ] / .10 + 1,000 / (1.10) 5 B = 379.08 + 620.92 = 1000 Using the calculator: N = 5; I/Y = 10; PMT = 100; FV = 1,000 CPT PV = -1000
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Valuing a Discount Bond with Annual Coupons Consider a bond with a coupon rate of 10% and coupons paid annually. The par value is $1,000 and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond? Using the formula: B = PV of annuity + PV of lump sum B = 100[1 – 1/(1.11) 5 ] / .11 + 1,000 / (1.11) 5 B = 369.59 + 593.45 = 963.04 Using the calculator: N = 5; I/Y = 11; PMT = 100; FV = 1,000 CPT PV = -963.04
Background image of page 6
7 Valuing a Premium Bond with Annual Coupons Suppose you are looking at a bond that has a 10% annual coupon and a face value of $1,000. There are 20 years to maturity and the yield to maturity is 8%. What is the price
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/22/2010 for the course FIN FIN310 taught by Professor Allen during the Spring '10 term at NC Wesleyan.

Page1 / 51

chap006 with additions - Chapter 6 - Interest Rates and...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online