Week 5 - Bonds

# Week 5 - Bonds - Finance 310 Prof Gamble BONDS Goals...

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Finance 310 Prof. Gamble BONDS Goals: Understand the nature of debt financing for individuals and organizations. Know the basic components of corporate bonds and what determines the value of these bonds. Reading: Chapter 7 “Interest Rates and Bond Valuation” Interest Rate Adjustments Additional Rule: When computing present or future values, you should adjust the interest rate to match the time period of the cash flows. effective annual rate (EAR) – the interest rate indicating the total amount of interest earned at the end of one year Equivalent n-period interest rate = ± ² ³´ µ ¶ ± Example: What is the equivalent 6-month (semiannual) interest rate to an effective annual rate of 6%? What is the equivalent monthly interest rate? Example: What is the present value of a trust fund that pays out \$8,000 a month forever given an effective annual discount rate of 6%? Annual percentage rate (APR) – the interest rate indicating the amount of interest earned in one year without the effect of compounding

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## This note was uploaded on 05/31/2011 for the course FIN 310 taught by Professor Ryan during the Spring '08 term at DePaul.

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Week 5 - Bonds - Finance 310 Prof Gamble BONDS Goals...

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