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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: Levelcoupon 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 (Zerocoupon) 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.
 Spring '11
 none
 Finance

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