Ch.6 FIN 351 - Quick Quiz How do you find the value of a...

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Unformatted text preview: Quick Quiz How do you find the value of a bond and why do bond prices change? (Slide 6.8) What is a bond indenture and what are some of the important features? (Slide 6.30) How does inflation affect interest rates? ( What is the term structure of interest rates? (Slide 6.50) Slide 6.48) What factors determine the required return on bonds? (Slide 6.54) 6-1 The Bond-Pricing Equation 1 1 (1 + YTM) t Bond Value = C YTM PV(Annuity) F + (1 + YTM) t PV(lump sum) C = Coupon payment; F = Face value Return to Quiz 6-2 The Bond Indenture "Deed of Trust" Contract between issuing company and bondholders includes: Basic terms of the bonds Total amount of bonds issued Secured versus Unsecured Sinking fund provisions Call provisions Deferred call Call premium Details of protective covenants Return 6-3 to Quiz The Fisher Effect The Fisher Effect defines the relationship between real rates, nominal rates and inflation (1 + R) = (1 + r)(1 + h) R = nominal rate (Quoted rate) r = real rate h = expected inflation rate Approximation: R = r + h Return to Quiz 6-4 Term Structure of Interest Rates Term structure: The relationship between time to maturity and yields, all else equal The effect of default risk, different coupons, etc. has been removed. Yield curve: Graphical representation of the term structure Normal = upward-sloping L/T > S/T Inverted = downward-sloping L/T < S/T Return to Quiz 6-5 Factors Affecting Required Return Default risk premium bond ratings Taxability premium municipal versus taxable Liquidity premium bonds that have more frequent trading will generally have lower required returns Maturity premium longer term bonds will tend to have higher required returns. Anything else that affects the risk of the cash flows to the bondholders will affect the required returns Return to Quiz 6-6 ...
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This note was uploaded on 04/28/2011 for the course FIN 351 taught by Professor Christen during the Spring '11 term at Youngstown State University.

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Ch.6 FIN 351 - Quick Quiz How do you find the value of a...

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