Topic 7_bonds - Topic 7 Bonds Readings Chap 5(5.1 5.3...

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Unformatted text preview: Topic 7 Bonds Readings: Chap 5 (5.1 - 5.3) Characteristics of bonds Bonds: the basics Bond - Security that obligates the issuer to make specified payments to the bondholder. Face Value (Par Value or Principal Value)- Payment at the maturity of the bond. Coupon - The interest payments made to the bondholder. Coupon Rate- Annual interest payment, as a percentage of face value. Bonds Government bonds Treasury bonds, notes, bill and etc How to invest? http://www.treasurydirect.gov/ Municipal bonds Corporate bonds How to read financial pages Wall Street Journal China bonds E.g. Government bonds Bonds By cash flow patterns: Level-coupon bonds; e.g. You want to buy a 5.5 % annual coupon bond, with a $1,000 face value, which matures in 3 years. Pure Discount (Zero-coupon) bonds; Bonds Coupon rate VS Interest rate (required rate of return) The coupon rate merely tells us what cash flow the bond will produce. e.g. You want to buy a 5.5 % annual coupon bond, with a $1,000 face value, which matures in 3 years. Bond Pricing The price of a bond is the Present Value of all cash flows generated by the bond (i.e. coupons and face value) discounted at the required rate of return. PV cpn r cpn r cpn par r t = + + + + + + + ( ) ( ) .... ( ) ( ) 1 1 1 1 2 Bond Pricing Example What is the price of a 5.5 % annual coupon bond, with a $1,000 face value, which matures in 3 years? Assume the interest rate is 3.5%....
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This note was uploaded on 06/07/2011 for the course FINANCE 103 taught by Professor None during the Spring '11 term at University of Illinois, Urbana Champaign.

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Topic 7_bonds - Topic 7 Bonds Readings Chap 5(5.1 5.3...

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