Chapter_07 - 7-1Click to edit Master subtitle...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 7-1Click to edit Master subtitle style7-1CHAPTER 7Bonds and Their ValuationnKey features of bondsnBond valuationnMeasuring yieldnAssessing risk7-2What is a bond?nA long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.7-3Bond marketsnPrimarily traded in the over-the-counter (OTC) market.nMost bonds are owned by and traded among large financial institutions.nFull information on bond trades in the OTC market is not published, but a representative group of bonds is listed and traded on the 7-4Issued bynTreasury federal governmentno default risknMunicipal state and local governmentnCorporatenForeign governments and corporations7-5Key Features of a BondnPar valuenface amount of the bondnpaid at maturitynCoupon interest ratenstated interest rate (generally fixed)nCoupon rate * par = $ interest payment each periodnMaturity date n# years until the bond must be repaid (10 to 40 yrs)nIssue datenYield to maturity (YTM)nrate of return nheld until maturity n(also called the promised yield).nIndenture7-6Call provisionnIssuers optionnCall in the bondnPay the bond earlynPrepayment optionnOption in the money?nInterest rates decline nhelps the issuernhurts the investornHigher required yields nCall premiumnTypically one years interest (coupon payments)nDeclining over time7-7Other types (features) of bondsnConvertible bondnholders option nexchange bond for common stocknWarrantnlong-term option nbuy a # shares (common stock)npredetermined / specified pricenPutable bondnholders option nsell bond back prior to maturitynIncome bond npays interest only when interest is earned by the firmncannot bankrupt the firm uneven cash flow invest risk7-8What is a sinking fund?nPay off a bond over its life nNot all the principal @ maturity.nSimilar to amortization on a term loan....
View Full Document

This note was uploaded on 04/19/2011 for the course BUSFIN 1030 taught by Professor Zutter during the Summer '08 term at Pittsburgh.

Page1 / 42

Chapter_07 - 7-1Click to edit Master subtitle...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online