Bonds(1)

# Bonds(1) - Bonds Presidents Have Been You mean to tell me...

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4/12/11 Bonds………. .

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4/12/11 President’s Have Been “You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of f***** bond traders?” -Former US President, Bill Clinton, said early in his first term
Click to edit Master subtitle style 4/12/11 T T The Bond King…. Bill Gross bbbbbo

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4/12/11 Bond Basics A Straight bond is an IOU that obligates the issuer of the bond to pay the holder of the bond: A fixed sum of money (called the principal, par value, or face value) at the bond’s maturity, and sometimes Constant, periodic interest payments (called coupons) during the life of the bond. U.S. Treasury bonds are straight bonds . Special features may be attached: Convertible bonds Callable bonds Putable bonds
4/12/11 Bond Basics 2 Two basic yield measures for a bond are its coupon rate and its current yield .

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4/12/11 Straight Bond Prices and Yield The price of a bond is found by adding together the present value of the bond’s coupon payments and the present value of the bond’s face value. The Yield to maturity (YTM) of a bond is the discount rate that equates the today’s bond price with the present value of the future cash flows of the bond. Keep in mind that YTM makes assumptions on the rate
4/12/11 The Bond Pricing Formula The price of a bond is found by adding together the present value of the bond’s coupon payments and the present value of the bond’s face value . The formula is: In the formula, C represents the annual coupon payments (in \$), FV is the face value of the bond (in \$), and M is the maturity of the bond, measured in years.

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4/12/11 Example: Using the Bond What is the price of a straight bond with: \$1,000 face value, coupon rate of 8%, YTM of 9%, and a maturity of 20 years?
4/12/11 Example: Calculating the Price Excel has a function that allows you to price straight bonds, and it is called PRICE. =PRICE(“Today”,“Maturity”,Coupon Rate,YTM,100,2,3) Enter “Today” and “Maturity” in quotes, using mm/dd/yyyy format. Enter the Coupon Rate and the YTM as a decimal.

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4/12/11 Premium and Discount Bonds, Bonds are given names according to the relationship between the bond’s selling price and its par value. Premium bonds : price > par value YTM < coupon rate Discount bonds : price < par value YTM > coupon rate Par bonds : price = par value YTM = coupon rate

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4/12/11 Premium and Discount Bonds, In general, when the coupon rate and YTM are held constant: For premium bonds : the longer the term to maturity, the greater the premium over par value. For discount bonds : the longer the term to maturity, the greater the discount from par value.

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4/12/11 Relationships among Yield For premium bonds : coupon rate > current yield > YTM For discount bonds : coupon rate < current yield < YTM For par value bonds : coupon rate = current yield = YTM
4/12/11 Calculating Yield to Maturity, I Suppose we know the current price of a bond, its coupon rate, and its time to maturity. How do we calculate the YTM?

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## This note was uploaded on 04/11/2011 for the course FIN 321 taught by Professor Blose during the Winter '07 term at Grand Valley State.

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Bonds(1) - Bonds Presidents Have Been You mean to tell me...

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