Lecture 7 notes Oct 6

Lecture 7 notes Oct 6 - Monday, October 06, 2010 Bond Price...

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Monday, October 06, 2010 Bond Price Movements o Vary Inversely With Interest Rates Why? Example Problems to Demonstrate Features Possessed By Some Bonds o The Call (Redemption) Feature o The Conversion Feature o The Extendible/Retractable Feature Lecture Format Only – (No PowerPoint Slides) Alternative Types of Investments Preferred shares (Lab Manual 325-335) Preferred Shares: Hybrid Financing o Characteristics possessed by All Preferred Shares Fixed rate of Dividend Payment of Dividends is Discretionary Non-Voting Shares Preference Rights vs Common Shares Liquidation Rights Dividend Rights Price Varies Inversely with Interest Rates o Characteristics Possessed by Some Preferred Shares The Cumulative Feature The call (Redemption) Feature The Convertible Feature The Participating Feature (example on Website) The Voting Feature Page 1
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Monday, October 06, 2010 Sample Examination Problem #1: Interest Rates Rise in the Economy How much would a rational investor pay for a Bell Canada 8 of Oct 4 ’20 if bonds of similar risk were issued today at a coupon rate of 10%? Solution: The investor is indifferent as to whether he or she owns the Bell 8 of ’20 or the new bond with a coupon rate of 10% when the yields on the two bonds are equal Yield on New 10 of ’30 = Yield on Bell 8 of ‘20 Therefore, let the purchase price that a rational investor will pay today for a Bell 8 of ’20 be X 10% = (8% X $1,000) + ($1,000 – X) 10 years X .1X = $80 + ($1,000 – X) 10 years
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Lecture 7 notes Oct 6 - Monday, October 06, 2010 Bond Price...

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