Lecture 7 notes Oct 6

# Lecture 7 notes Oct 6 - Monday Bond Price Movements o Vary...

This preview shows pages 1–3. Sign up to view the full content.

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

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

View Full Document
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
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

Lecture 7 notes Oct 6 - Monday Bond Price Movements o Vary...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online