Chapter 7 Notes

Chapter 7 Notes - Chapter 7: Interest Rates and Bond...

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Chapter 7: Interest Rates and Bond Valuation Bonds and Bond Valuation - When a corporation or government wishes to borrow money from the public on a long- term basis, it usually does so by issuing or selling debt securities that are generically called bonds Bond Features and Prices - Bond is normally an interest-only loan - Coupons - the stated interest payment made on a bond o The type of bond we are describing is sometimes called a level coupon bond - Face Value (Par Value)- principal amount of a bond that is repaid at the end of the term o A bond that sells for its par value is called a par value bond - Coupon Rate = Annual Coupon / Face Value of a Bond - Maturity - specified date on which the principal amount of a bond is paid Bond Values and Yields - As time passes, interest rates change in the market place; cash flows from a bond, however, stay the same o As a result the value of a bond will fluctuate - When interest rates rise, the present value of the bond’s remaining cash flows declines, and the bond is worth less - When interest rates fall, the bond is worth more - To determine the value of a bond at a particular point in time, we need to know the number of periods remaining until maturity, the face value, the coupon, and the market interest rate for bonds of similar features - Yield to Maturity (YTM) - rate required in the market of a bond
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Chapter 7 Notes - Chapter 7: Interest Rates and Bond...

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