finance-final - Bond is issued by company and then promise...

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Bond is issued by company and then promise to pay in future (plus interest). Most bonds pay interest every 6 months. Coupon bond makes interest pmt. If no interest pmt, it is O-coupon bond. Premium bond: V-bond > Face value. If Rate < coupon rate => premium bond. Discount bond: V-bond < Face value. If Rate > coupon rate =>discount bond. If discount rate = coupon rate => V-bond = Face value. A O-coupon bond also called “pure discount” bond. YTM is the rate R such that value @ R = price Bond value move inverse to interest rate. Longer term bonds are more sensitive (bigger changes) to int rate then shorter term bonds. R1 < R2 < f2 Increasing term: spot rates < forward rates: R1 < R2 < f2 Decreasing term: spot rates > forward rates Term structure theory forward rate theory Theory 1 Pure expectations: forward rates = expected future spot rates ( f2= exp R1 next year) It’s not exact because increasing term occurs more frequently. Theory 2 Liquidity Preference Theory: forward rates = exp future rate + liquidity premium.
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This note was uploaded on 02/19/2011 for the course FIN 360 taught by Professor Kesler during the Spring '11 term at Northern Oklahoma College.

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finance-final - Bond is issued by company and then promise...

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