Example-BOND

Example-BOND - Addendum to CHAPTER 7 BONDS AND THEIR...

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Addendum to CHAPTER 7 BONDS AND THEIR VALUATION - a bearer bond illustration Key Features of Bonds - LT contract - borrower agrees to make payments of interest & principal on specific dates to holders of bonds Bearer bond illustration & valuation
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Bond features par value coupon interest payment fixed rate floating rate zero coupon maturity date call provision sinking fund indenture convertible bonds bonds w/ warrants - options that permit holder to buy stock for stated price income bonds indexed bonds (e.g., Treasury Inflation Indexed securities)
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Key Features of a bond: 1. Par value : Face amount; paid at maturity. Assume $1000 for most bonds. For this bond, par value = $5000. 2. Coupon interest rate : Stated interest rate. Multiply by par to get $ of interest. Generally fixed. example - of Louisiana bearer bond (on previous slide?) - paid $181.25 semi-annually (how much per year)?? par value = $5000; coupon rate = ?? 3. Maturity: Years until bond must be repaid. Declines. Five years until 1/1/09 4. Issue date : Date when bond was issued. 7/1/79
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How does adding a “call provision affect a bond? Issuer can refund if rates decline. That helps the issuer but hurts the investor. Therefore, borrowers are willing to pay more, and lenders require more, on callable bonds. Most corporate & many muni. bonds have a deferred call and a declining call premium . (older US gov. bonds had call provision)- see indenture - this bond deferred call - not callable until 1989 & then at 102%; call premium fell to 100% after July 1994
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Financial Asset Values ( 29 ( 29 ( 29 PV = CF 1+r ... + CF 1+r 1 n 1 2 2 1 CF r n . 0 1 2 n r CF 1 CF n CF 2 Value ... + + +
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The discount rate (r d ) is the opportunity cost of capital , i.e., the rate that could be earned on alternative investments of equal risk.= risk free rate + inflation premium + liquidity premium + default risk premium r d = r * + IP + LP + MRP + DRP.
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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Example-BOND - Addendum to CHAPTER 7 BONDS AND THEIR...

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