chp 7

# 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
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
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%
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
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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