13 - • European bonds have an interest payment once a...

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12:14 EAR = ( 1 + APR/m)^m – 1  EAR = ( 1 + periodic rate)^m – 1 APR ignores interest on interest EAR = ( 1 + APR/m)^m – 1 1 + 4.6929/26.071428)^26.071428 – 1 = $7383.11453 < will earn that much for  every dollar with a 469% bank of America problem FV = PV (1+r)^t FV = PV (1 + EAR)^t FV = PV (1 + e^rt – 1)^t FV = PVe^rt       < 4 variables and 1 constant Other ways for solving: PV = FVe^-r*t T = ln(FV/PV) / r R = ln(FV/PV) / t CHAPTER 7  Bond Par Value (face value) – corp are around 1K, Govt are around 10K
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Coupon rate – the fixed fraction of the face value paid out annually as interest  only. Coupon payment = coupon rate * face value
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Unformatted text preview: • European bonds have an interest payment once a year • American bonds have an interest payment twice a year Maturity Date Yield or Yield to maturity (YTM) – the apr that sets the present value of bonds cash flows equal to current market price Present Value of Cash Flows as Rates Change • Bond Value = PV of coupons + PV of par • Bond = PV annuity + PV of lump sum • As interest rates increase the PV’s decrease • As interest rates increase, bond prices decrease and vice versa The Bond-Pricing Equation Bond Value = C ( 1 – 1/(1+r 12:14 12:14...
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This note was uploaded on 10/05/2010 for the course FIN 3000 taught by Professor Ackute during the Spring '10 term at Kennesaw.

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13 - • European bonds have an interest payment once a...

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