MGMT310_lecture10

MGMT310_lecture10 - Last Lasttimewediscussed Review

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st time we discussed… Last time we discussed…
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eview concepts from last lecture: Review concepts from last lecture: 1. Bond A matures in 10 years, has a face value of $1000, has a coupon rate of 12%, and makes its coupon payments on a semi annual basis (the next coupon will be 6 months from today). If the yield to maturity is quoted at 15% what is the price of this bond? 2. Bond B matures in 5 years, has a face value of $1000, and has a coupon rate of 7%. If the current market price of the bond is $1000, what is the yield to maturity? 3. When Bond C was issued last year, the required rate of return was 10%. Now it is 11%. Has the price of Bond Z increased or decreased? 4. Bond D is a discount bond with a coupon rate of 8%. What can you say about the yield to maturity?
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eterminants of elds Determinants of yields The real rate of interest Expected future inflation Interest rate risk Default risk premium Taxability premium Liquidity premium t’s talk a little about each of these Let s talk a little about each of these…
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flation nd real interest rates Inflation and real interest rates    1R 1r 1i    r1 or where R is the nominal rate of return r is the real rate of return iis the rate of inflation Approximation: Rr i The real interest rate tells us by how much our real spending power increases
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xes nd liquidity considerations Taxes and liquidity considerations Different bonds receive different tax treatment (e.g., muni vs corporate) Thus, bonds w/ more favorable tax treatment command a premium (or equivalently, a lower required rate of return) Bond have varying degrees of liquidity (i.e., some are more
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MGMT310_lecture10 - Last Lasttimewediscussed Review

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