{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

BCOR 2200 Chapter 6 w cq

BCOR 2200 Chapter 6 w cq - Chapter 6 Interest Rates and...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 6 Interest Rates and Bond Valuation
Image of page 1

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

View Full Document Right Arrow Icon
2 Chapter 6 Outline: 1.Bonds and Bond Valuation 2.More on Bond Features 3.Bond Ratings 4.Some Different Types of Bonds 5.Bond Markets 6.Inflation and Interest Rates 7.Determinants of Bond Yields
Image of page 2
3 Key Concepts and Skills: Know the important bond features and bond types Understand bond how to calculate bond prices and why prices fluctuate Understand bond ratings Understand the impact of inflation on interest rates Understand the Term Structure of Interest Rates and the determinants of bond yields Understand the determinants of bond yields
Image of page 3

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

View Full Document Right Arrow Icon
4 6.1 Bonds and Bond Valuation First some terminology: A 30 year $1,000 bond pays $100 per year (annual payments) and repays the $1,000 in thirty years. The market requires a 9% return on loans to this company. COUPON = $100 COUPON RATE = Coupon/Face = $100 /$1,000 = 10% COUPON PERIOD = Annual FACE VALUE or PAR VALUE = $1,000 TIME (or TERM) TO MATURITY = 30 years YIELD TO MATURITY (YTM) = required rate = 9%
Image of page 4
5 A Bond is Defined (or Identified) by: 1. Issuer A Corporation (corps): GE, GM… A Municipality (Munis): Boulder, New York State, E470 Public Highway Authority… The Federal Government (Govies): Issued to finance the deficit and debt 2. Maturity Usually a date (but in this class we’ll use a time to maturity) A ten year bond is a 2019 but we’ll call it a ten year. 3. Structure Coupon, Zero, Amortizing
Image of page 5

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

View Full Document Right Arrow Icon
6 A Bond is Defined (or Identified) by: 1. Coupon Rate (if applicable) 7% Semi-Annual, 10% Annual, or “Zero-Coupon” 2. Bond Features Callable, Convertible... (we’ll talk about this later) 3. Rating Rating agencies (S&P, Moodys, Fitch…) issue public rating. BBB or higher are Investment Grade BB or lower are N on-Investment Grade (junk) Example: GE 5.125 of 2028 (“five and an eighth of 28”) GE corp bond. Matures in 2028. Pays a 5.125% S-A coupon. AAA rated
Image of page 6
7 Calculate the price of the bond: 30 year $1,000 Face or Par Value, 10% annual coupon and 10% required rate (so YTM = 10%) Two Components: 1. Thirty payments of $100, discounted at 10%: PV = 100/(1.1) + 100/(1.1) 2 + 100/(1.1) 3 + … + 100/(1.1) 30 = $942.69 N = 30 I/YR = 10 PMT = 100 PV = -942.69 1. One payment of $1,000 in thirty years PV = 1,000/(1.1) 30 = $57.31 N = 30 I/YR = 10 FV = 1000 PV = -57.31 Or both at the same time: Total Price: = $942.69 + $57.31 = $1,000 N = 30 I/YR = 10 PMT = 100 FV = 1000 PV = -1000 Equal to the Face Value or Par Value
Image of page 7

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

View Full Document Right Arrow Icon
8 Calculate the price of the bond: Same bond with a different YTMs: Why might the bond’s YTM change? The issuer’s credit rating has changed All rates have changed 30 year $1,000 Face or Par Value, 10% annual coupon 8% required rate (YTM = 8%) N = 30 I/YR = 8 PMT = 100 FV = 1000 PV = -1225 Price = $1,225 > $1,000 Great than the Face Value or Par Value ( Premium ) 30 year $1,000 Face or Par Value, 10% annual coupon 12% required rate (YTM = 12%) N = 30 I/YR = 12 PMT = 100 FV = 1000 PV = -839 Price = $839 < $1,000
Image of page 8
Clicker Question: A 20 year, $1,000 face-value bond pays an 7% annual coupon and has a discount rate of 9%.
Image of page 9

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

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern