2504c_1004 - BUSI 2504c - Essentials of Business Finance...

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Unformatted text preview: BUSI 2504c - Essentials of Business Finance Monday, October 4, 2010 7 Bonds announcements no lecture next week (Thanksgiving) next class monday october 18 quiz #2 monday october 18 chapters 6 and 7 BUSI 2504c Monday, October 4, 2010 2 / 32 chapter 7: bonds bond definitions bond pricing yield to maturity zero-coupon bond inflation and interest rate (incl. fisher effect) term structure of interest rates BUSI 2504c Monday, October 4, 2010 3 / 32 7.1: bond definitions Bond- long term debt instruments issued by corporations or governments Coupons- regular interest payments made on a bond Par value (face value)- principal amount of a bond that is repaid at the end of the term Coupon rate- annual coupon payment(s) divided by par value Maturity date- specified date at which the principal amount is repaid Yield to maturity (YTM)- market interest rate that equates a bonds PV of interest payments and PV of principal repayment with its price, ie. required market rate that makes the discounted cash flows from a bond equal to the bonds price BUSI 2504c Monday, October 4, 2010 4 / 32 7.1: coupon bond BUSI 2504c Monday, October 4, 2010 5 / 32 7.1: bond prices If YTM = coupon rate, then par value = bond price Selling at par If YTM > coupon rate, then par value > bond price Selling at a discount, called a discount bond If YTM < coupon rate, then par value < bond price Selling at a premium, called a premium bond BUSI 2504c Monday, October 4, 2010 6 / 32 7.1: bond pricing equation Bond Value = PMT 1- 1 ( 1 + r ) t r | {z } present value of series of coupon payments (annuity) + FV ( 1 + r ) t | {z } present value of par (single lump sum) Remember, as interest rates increase the PVs decrease So as interest rates increase, bond prices decrease and vice versa BUSI 2504c Monday, October 4, 2010 7 / 32 7.1: semiannual coupon bond - example Most bonds in Canada make coupon payments semiannually. Suppose you have an 8% semiannual-pay bond with a face value of $1,000 that matures in 7 years. If the yield is 10%, what is the price of this bond? The bondholder receives a payment of $40 every six months (a total of $80 per year) The market automatically assumes that the yield is compounded semiannually The number of semiannual periods is 14 (7 years 2 periods/year) answer : 40 PMT ; 14 N ; 5 I/Y ; 1000 FV ; CPT PV =-901.01 BUSI 2504c Monday, October 4, 2010 8 / 32 7.1: interest rate risk and time to maturity (figure 7.2, p.181)interest rate risk and time to maturity (figure 7....
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This note was uploaded on 12/15/2010 for the course BUSINESS BUSI 2504 taught by Professor Georgekowaski during the Spring '10 term at Carleton CA.

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2504c_1004 - BUSI 2504c - Essentials of Business Finance...

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