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# CH 7 - Yield to maturity(YTM = APR for a bond Example YTM =...

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Yield to maturity (YTM) = APR for a bond Example: YTM = 8% semi annual 8%/2 = 4% “r” or “I/Y” Coupon yield – annual coupons / par value Current yield – annual coupons / price Effective annual yield – Effective Annual Rate (EAR) STUDY HOURS: Sat 10-12 Tuesday 12-2 next Wednesday 10-12 Bond Valuation Bond Value = PV of coupons + PV of par Bond Value – PV of annuity + PV of lump sum As interest rates increase present values decrease So as interest rates increase, bond prices decrease and vice versa Bond Prices: relationship between Coupon and Yield If YTM = coupon rate, then par value = bond price If YTM > coupon rate, then par value > bond price o Why? The discount provides yield above coupon rate o Price below par value, called a discount bond If YTM < coupon rate, then par value < bond price o Why? Higher coupon rate causes value above par o Price above par value called a premium bond IN OTHER WORDS IF RATES GO UP BOND PRICES GO DOWN Computing Yield to Maturity Yield-to=maturity is the rate implied by the current bond price Finding the YTM requires trial and error if you do not have a

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financial calculator and is similar to the process for finding r with an annuity If you have a financial calc enter N, PV, PMT, and FV
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CH 7 - Yield to maturity(YTM = APR for a bond Example YTM =...

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