ISE2014_Class14

# ISE2014_Class14 - Class 14 Bonds and Alternatives ISE 2014...

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Click to edit Master subtitle style Class 14 – Bonds and Alternatives ISE 2014 Fall 2010

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Your Methods PW Method FW Method AW Method IRR Method
Continuing with Bonds Today we’re going to finish up Chapter 5 with some more example bond problems Last class we learned how to solve for: VN (purchase price) C (sell price) i% (return rate) Today we’ll practice solving for the other

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Continuing with Bonds So what’s left so solve for? Z (face value or par value) r (bond rate) In the real world these are known values printed on the bond We can still solve for them as a missing piece of information
Bond Example 4 We purchase a 10-year bond for \$500 The bond has a face value of \$750 and we hold it until maturity We earned an overall return of 8% on our investment in the bond What was the bond rate?

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Bond Example 4 Let’s setup a cash flow diagram and identify our parameters: VN = \$500 C = Z = \$750 N = 10 years i% = 8%
Bond Example 4 Setup our equation and solve for r: VN = C(P/F,i%,N) + r(Z)(P/A,i%,N) 500 = 750(P/F,8%,10) + r(750)(P/A,8%,10) 500 = 750(.4632) + r(750)(6.7101) r = .030322 or about 3%

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Bond Example 5 We purchase a 30 year bond for \$200 and keep the bond until maturity The bond rate is 6% We earned 10% return on our total investment What was the face value of the bond?
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ISE2014_Class14 - Class 14 Bonds and Alternatives ISE 2014...

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