Winter 2011 - Week 6 (Otavio)

Winter 2011 - Week 6 (Otavio) - HowtoValueBondsand...

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How to Value Bonds and  Stocks (abridged)
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Bonds: Important bond features and bond types Bond values and how they fluctuate
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Bonds: Important bond features and bond types Bond values and how they fluctuate Stocks: Stock prices and future dividends Stock dividend growth Computing stock prices with dividend growth model
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Bonds are securities used to borrow money in the  credit markets The most important bond features/descriptors are: Par (face) value – Fixed* Coupon rate – Fixed* Maturity Date – Fixed* YTM: yield to maturity is the market interest rate  on the bond.
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Bonds are securities used to borrow money in the  credit markets The most important bond features/descriptors are: Par (face) value – Fixed* Coupon rate – Fixed* Maturity Date – Fixed* YTM: yield to maturity is the market interest rate  on the bond.    NOT fixed
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Primary Principle: Value = PV of expected future cash flows 
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Primary Principle: Value = PV of expected future cash flows  Bond value: determined by the PV of coupon  payments AND par value.
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Primary Principle: Value = PV of expected future cash flows  Bond value: determined by the PV of coupon  payments AND par value. Interest rates are inversely related to present  values (i.e. bond values). Interest down   Bond prices up Interest up   Bond prices down
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T T ) (1 FV R R) (1 1 - 1 C Value Bond R + + + =
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Coupon rate = 0%
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Coupon rate = 0% YTM (yield to maturity) comes from difference 
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This note was uploaded on 03/28/2011 for the course ENGR 110 taught by Professor . during the Winter '10 term at UCLA.

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Winter 2011 - Week 6 (Otavio) - HowtoValueBondsand...

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