ch9-lect - Chapter 9 Valuing Bonds Introduction Bonds are...

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Chapter 9 Valuing Bonds Introduction Bonds are debt instruments, very specifically, long-term promissory notes. For example, businesses issue (sell) corporate bonds to outside investors to raise money to finance their operations. In return, the company pays the investors interest on the bonds (usually semi- annually) and returns their principal at the bonds’ maturity (10, 20, 30 years). Bond Valuation Bonds are typically issued at a $1,000 ‘par value’. Par is the face value (principle) of a bond. The ‘coupon rate’ is the interest rate at which the bonds are issued, which is the interest the company promises to pay over the term of the bond. Two interest rates are important when valuing bonds, however, the coupon rate and the prevailing market rate (or yield to maturity). You use the coupon rate to calculate the coupon payment (interest payment) to the investor each year or twice a year. The prevailing market rate or yield to maturity is used to calculate the present value, or the value of the bonds in today’s dollars. Many corporate bonds contain ‘call provisions’, which means that the corporation can pay off the investors before the bond’s maturity date if the prevailing interest rates are beneficial to the corporation (adapted from J. Howard, 2005). Here is an example of how we value a bond (Klose, 2006). Using the bond valuation equation:
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This note was uploaded on 02/14/2011 for the course FINANCE 615 taught by Professor Green during the Fall '09 term at UMBC.

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ch9-lect - Chapter 9 Valuing Bonds Introduction Bonds are...

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