08.1 THE BOND MARKET

# 08.1 THE BOND MARKET - SECTION 8.1 THE BOND MARKET BOND...

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SECTION 8.1: THE BOND MARKET

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BOND Legal contract specifying the terms of a loan between a borrower and a lender Contract specifies 1. Amount that a borrower will repay to the lender (Par Value or Principal) 2. When the Principal will be repaid (time to maturity) 3. Interest rate (or amount of interest) that will be paid on the Par Value 4. Date when each interest payment will be made
BOND EXAMPLE: Ford issues a bond with Par Value of \$1 million for 30 years at 4% annual interest. 1. Principal = \$1 million 2. Time to maturity = 30 years 3. Interest rate = 4% per year 4. Annual interest = \$40,000 per year 5. Interest of \$40,000 will be paid at the end of each year 6. A payment of \$1 million will be made at the end of 30 years

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THE PRICE PAID FOR A BOND DEPENDS IN PART ON THE MARKET INTEREST RATE The price a lender will pay for a bond depends on 1. The market interest rate 2. The amount of interest paid by the bond
EXAMPLE: 1. Suppose the market interest rate is 5%. 2. Suppose a bond will pay \$40,000 per year in interest every year. 3.

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## This note was uploaded on 12/13/2010 for the course ECON 0110 taught by Professor Kenkel during the Fall '08 term at Pittsburgh.

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08.1 THE BOND MARKET - SECTION 8.1 THE BOND MARKET BOND...

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