Calculating Bonds

Calculating Bonds - C alculating Bonds Bond Definitions...

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Calculating Bonds Bond Definitions Bond Par Value (face value) Coupon rate – fixed fraction of the face value paid out annually as interest only; set when the bond is issued and never changes Coupon payment = coupon rate * face value o European style bond – coupon rate paid once a year o American style bond – ½ coupon rate paid twice a year Maturity date o Get back principal and last interest payment Yield or Yield to maturity (YTM) – the APR that sets the PV of the future cash flows of the bond equal to its current market price PV of Cash Flows as Rates Change Bond Value = PV of coupons + PV of par Bond = PV annuity + PV of lump sum C = PMT R = I/Y F = FV Bond Value = PV T = N If YTM = coupon rate, par value = bond price
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If YTM > coupon rate, par value > bond price (discount) If YTM < coupon rate, par value < bond price (premium) Interest Rate Risk Price Risk o Change in price due to changes in interest rates o Long-term bonds have more price risk than short-term bonds
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Calculating Bonds - C alculating Bonds Bond Definitions...

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