Bond pricing
Bond pricing
Note: You will need to refer to the TVM charts at
the back of chapter 6 of the Kieso text in order to
solve for these.
Coupon rate vs. Market rate
Coupon rate vs. Market rate
Bonds can be issued at a premium, discount or par value. The
relationship between the coupon (face) rate of the bond relative to
the market (yield) determines the selling price of the bond
If the coupon (bond) rate is GREATER than the market rate, the
bond will sell at a PREMIUM. This is because our bond offers
better interest than other securities in the market, so we can
charge a higher price. .
CR>MR = Prem.
If the coupon (bond) rate is LESS than the market rate, the bond
will sell at a DISCOUNT. This is because we have to offer our
bonds for less to entice buyers.
CR<MR = Disc.
If the coupon and market rate are the SAME, the bond will sell at
PAR.
CR=MR = Par.
Components of bonds
Components of bonds
There are two parts to a bond – the principal and the
interest.
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- Fall '09
- CHERIEABAKER
- Pricing, Interest Rates, market rate
