FM07 - After reading this chapter, students should be able...

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Unformatted text preview: After reading this chapter, students should be able to: List the four main classifications of bonds and differentiate among them. Identify the key characteristics common to all bonds. Calculate the value of a bond with annual or semiannual interest payments. Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa. Calculate the current yield, the yield to maturity, and/or the yield to call on a bond. Differentiate between interest rate risk, reinvestment rate risk, and default risk. List major types of corporate bonds and distinguish among them. Explain the importance of bond ratings and list some of the criteria used to rate bonds. Differentiate among the following terms: Insolvent, liquidation, and reorganization. Read and understand the information provided on the bond market page of your newspaper. Learning Objectives: 7 - 1 Chapter 7 Bonds and Their Valuation LEARNING OBJECTIVES This chapter serves two purposes. First, it provides important and useful information on bonds per se. Second, it provides a good example of the use of time value concepts, so it reinforces the topics covered in Chapter 6. We begin our lecture with a discussion of the different types of bonds and their characteristics. Then we move on to how bond values are established, how yields are determined, the effects of changing interest rates on bond prices, and the riskiness inherent in different types of bonds. The details of what we cover, and the way we cover it, can be seen by scanning Blueprints , Chapter 7. For other suggestions about the lecture, please see the Lecture Suggestions in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 4 OF 58 DAYS (50-minute periods) Lecture Suggestions: 7 - 2 LECTURE SUGGESTIONS 7-1 Yes, the statement is true. 7-2 False. Short-term bond prices are less sensitive than long-term bond prices to interest rate changes because funds invested in short-term bonds can be reinvested at the new interest rate sooner than funds tied up in long-term bonds. 7-3 The price of the bond will fall and its YTM will rise if interest rates rise. If the bond still has a long term to maturity, its YTM will reflect long-term rates. Of course, the bonds price will be less affected by a change in interest rates if it has been outstanding a long time and matures shortly. While this is true, it should be noted that the YTM will increase only for buyers who purchase the bond after the change in interest rates and not for buyers who purchased previous to the change. If the bond is purchased and held to maturity, the bondholders YTM will not change, regardless of what happens to interest rates....
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This note was uploaded on 05/29/2011 for the course HRM 100 taught by Professor Elijahchen during the Spring '11 term at Abraham Baldwin Agricultural College.

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FM07 - After reading this chapter, students should be able...

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