chp 7 - Interest Rates and Bond Valuation Chapter Seven...

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Interest Rates and Bond Valuation Chapter Seven
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Chapter Outline Bonds and Bond Valuation More on Bond Features Bond Ratings Some Different Types of Bonds Bond Markets Inflation and Interest Rates Determinants of Bond Yields
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Bond Definitions Bond Par value (face value) Coupon rate Coupon payment Maturity date Yield or Yield to maturity
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Present Value of Cash Flows as Rates Change Bond Value = PV of coupons + PV of par ( face value) Bond = PV annuity(ch.6) + PV of lump sum (ch.5) As interest rates increase the PV’s decrease As interest rates increase, bond prices decrease and vice versa
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The Bond-Pricing Equation t t r) (1 F r r) (1 1 - 1 C Value Bond + + + =
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Relationship Between Price and Yield-to-maturity 600 700 800 900 1000 1100 1200 1300 1400 1500 0% 2% 4% 6% 8% 10% 12% 14%
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Valuing a Bond Example 1 Suppose you are looking at a bond that has a 10% coupon rate, annual coupons, and a face value of $1000. There are 5 years to maturity and the YTM is 11%. What is the price of this bond? Value = PV of annuity + PV of lump sum Value = 1 Value = ? 100 PMT , 1000 FV , 5 N , 11 I/Y , CPT PV => -963.0410 ( you have to pay this much )
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Valuing a Bond Example 2 Suppose you are looking at a bond that has a 9% coupon rate, semi-annual coupons, and a face value of $1000. There are 20 years to maturity and the YTM is 9%. What is the price of this bond? Value = PV of annuity + PV of lump sum Value = ? Value = ? 45 PMT , 1000 FV , 40 N , 4.5 I/Y , CPT PV => -1000
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Valuing a Bond Example 3 Suppose you are looking at a bond that has a 10% coupon rate, semi-annual coupons, and a face value of $1000. There are 20 years to maturity and the YTM is 8%. What is the price of this bond? Value = PV of annuity + PV of lump sum Value = ? Value = ? 50 PMT , 1000 FV , 40N ,4% I/Y , CPT PV => -1197.39927
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Bond Prices: Relationship Between Coupon Rate and Yield to Maturity 1. If YTM = coupon rate, par value = bond price 1. Par bond 2. If YTM > coupon rate, par value > bond price
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chp 7 - Interest Rates and Bond Valuation Chapter Seven...

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