ch 07_IM - Chapter 7 Bonds and Their Valuation Learning...

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Unformatted text preview: Chapter 7 Bonds and Their Valuation Learning Objectives After reading this chapter, students should be able to: Identify the different features of corporate and government bonds. Discuss how bond prices are determined in the market, what the relationship is between interest rates and bond prices, and how a bond’s price changes over time as it approaches maturity. Calculate a bond’s yield to maturity and its yield to call if it is callable and determine the “true” yield. Explain the different types of risk that bond investors and issuers face and the way a bond’s terms and collateral can be changed to affect its interest rate. Chapter 7: Bonds and Their Valuation Learning Objectives 137 Lecture Suggestions This chapter serves two purposes. First, it provides important and useful information on bonds per se. Second, it provides a good example of the use of time value concepts, so it reinforces the topics covered in Chapter 5. We begin our lecture with a discussion of the different types of bonds and their characteristics. Then we move on to how bond values are established, how yields are determined, the effects of changing interest rates on bond prices, and the riskiness inherent in different types of bonds. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 7, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods) 138 Lecture Suggestions Chapter 7: Bonds and Their Valuation Answers to End-of-Chapter Questions 7-1 From the corporation’s viewpoint, one important factor in establishing a sinking fund is that its own bonds generally have a higher yield than do government bonds; hence, the company saves more interest by retiring its own bonds than it could earn by buying government bonds. This factor causes firms to favor the second procedure. Investors also would prefer the annual retirement procedure if they thought that interest rates were more likely to rise than to fall, but they would prefer the government bond purchase program if they thought rates were likely to fall. In addition, bondholders recognize that, under the government bond purchase scheme, each bondholder would be entitled to a given amount of cash from the liquidation of the sinking fund if the firm should go into default, whereas under the annual retirement plan, some of the holders would receive a cash benefit while others would benefit only indirectly from the fact that there...
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This note was uploaded on 03/30/2011 for the course WCOB 2043 taught by Professor Staff during the Spring '08 term at Arkansas.

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ch 07_IM - Chapter 7 Bonds and Their Valuation Learning...

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