{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

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

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

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

View Full Document
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?
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

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

View Full Document
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
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

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

View Full Document
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
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

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 51

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

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

View Full Document
Ask a homework question - tutors are online