Chapter 7 Formulas

# Chapter 7 Formulas - Chapter 7 Formulas I What Each Letter...

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Unformatted text preview: Chapter 7 Formulas: I. What Each Letter Means: • V B = Coupon Price of Bond • r d = Discount RateUsed to Calculate the PV of the Cash Flows (Bond’s Price) N declines over time after the bond has been issued This amount must be paid at maturity When: V B = I N T = PV (Present Value) Annuity Factor and When + M = PV (Present Value) of a Lump Sum Fixed-Rate Bond Sells at its Par Value [Fixed-Rate Bond Sells = (equal to) Par Value] Also Occurs Whenever: The Going Rate of Interest is Equal to the Coupon Rate [Rate of Interest = (equal to) coupon rate] Fixed-Rate Bond Sells Below its Par Value [Fixed-Rate Bond Sells < (less than) Par Value] Also Occurs Whenever: The Going Rate of Interest is Above the Coupon Rate [Rate of Interest > (greater than) coupon rate] Fixed-Rate Bond Sells Above its Par Value [Fixed-Rate Bond Sells > (greater than) Par Value] Also Occurs Whenever : The Going Rate of Interest is Below the Coupon Rate [Rate of Interest < (less than) coupon rate] r d = market rate V B = price ; & The Market Interest Rate on the Bond N Used to Calculate the PV of the Cash Flows (Bond’s Price) N declines over time after the bond has been issued This amount must be paid at maturity When: V B = I N T = PV (Present Value) Annuity Factor and When + M = PV (Present Value) of a Lump Sum Fixed-Rate Bond Sells at its Par Value [Fixed-Rate Bond Sells = (equal to) Par Value] Also Occurs Whenever: The Going Rate of Interest is Equal to the Coupon Rate [Rate of Interest = (equal to) coupon rate] Fixed-Rate Bond Sells Below its Par Value [Fixed-Rate Bond Sells < (less than) Par Value] Also Occurs Whenever: The Going Rate of Interest is Above the Coupon Rate [Rate of Interest > (greater than) coupon rate] Fixed-Rate Bond Sells Above its Par Value [Fixed-Rate Bond Sells > (greater than) Par Value] Also Occurs Whenever : The Going Rate of Interest is Below the Coupon Rate [Rate of Interest < (less than) coupon rate] r d = market rate V B = price • = Time Until Maturity (on calculator); & The # of Years Before the Bond Matures; • V B = I N T (in a problem) is a: PV (Present Value) Annuity Factor • + M (in a problem) is a: Present Value of a Lump Sum • I N T = Dollars of Interest Paid Each Year = Coupon Rate x Par Value; & Coupon Payment; & PMT (in calculator terminology) • M = The Par (or Maturity) Value Used to Calculate the PV of the Cash Flows (Bond’s Price) N declines over time after the bond has been issued This amount must be paid at maturity When: V B = I N T = PV (Present Value) Annuity Factor and When + M = PV (Present Value) of a Lump Sum Fixed-Rate Bond Sells at its Par Value [Fixed-Rate Bond Sells = (equal to) Par Value] Also Occurs Whenever: The Going Rate of Interest is Equal to the Coupon Rate [Rate of Interest = (equal to) coupon rate] Fixed-Rate Bond Sells Below its Par Value [Fixed-Rate Bond Sells < (less than) Par Value] Also Occurs Whenever: The Going Rate of Interest is Above the Coupon Rate [Rate of Interest > (greater than) coupon rate]...
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Chapter 7 Formulas - Chapter 7 Formulas I What Each Letter...

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