MGMT310_lecture10

# MGMT310_lecture10 - Last Lasttimewediscussed Review 1...

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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?
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
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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## This note was uploaded on 01/31/2011 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue.

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MGMT310_lecture10 - Last Lasttimewediscussed Review 1...

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