FM12 Ch 05 Tool Kit - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15...

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Chapter 5. Tool Kit for Bonds, Bond Valuation, and Interest Rates Years to Mat: 15 Coupon rate: 10% Annual Pmt: $100 Par value = FV: $1,000 10% The easiest way to solve this problem is to use Excel's PV function. Click fx, then financial, then PV. Then f the menu items as shown in our snapshot in the screen shown just below. Value of bond = $1,000.00 Thus, this bond sells at its par value. That situation always exists if the g rate is equal to the coupon rate. The PV function can only be used if the payments are constant, but that is normally the case for bonds. The value of any financial asset is the present value of the asset's expected future cash flows. The key inputs a expected cash flows and (2) the appropriate discount rate, given the bond's risk, maturity, and other charact model developed here analyzes bonds in various ways. BOND VALUATION (Section 5.3) A bond has a 15-year maturity, a 10% annual coupon, and a $1,000 par value. The required rate of return ( maturity) on the bond is 10%, given its risk, maturity, liquidity, and other rates in the economy. What is a fa bond, i.e., its market price? First, we list the key features of the bond as "model inputs" : Required return, r d : A B C D E F 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46
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Bond Prices on Actual Dates Here is the data for MicroDrive's bond as of the day it was issued. Settlement date (day on which you find bond price) = 1/5/2007 Maturity date = 1/5/2022 Coupon rate = 10.00% 10.00% 100 Frequency (# payments per year) = 1 Basis (1 is for actual number of days in month and year) 1 Using PRICE function with inputs that are cell references: Value of bond based on $100 face value = $100.00 Value of bond in dollars based on $1,000 face value = $1,000.00 Using the PRICE function with inputs that are not cell references: Value of bond based on $100 face value = =PRICE(DATE(2007,1,5),DATE(20 Value of bond based on $100 face value = 100.0000 Value of bond in dollars based on $1,000 face value = $1,000.00 Interest Rate Changes and Bond Prices Bond Value Going rate, r: $1,000 0% $2,500.00 5% $1,518.98 10% $1,000.00 15% $707.63 20% $532.45 Thus far we have evaluated bonds assuming that we are at the beginning of an interest payment period. Thi new issues, but it is generally not correct for outstanding bonds. However, Excel has several date and time fu bond valuation function that uses the calendar, so we can get exact valuations on any given date. Required return, r d = Redemption (100 means the bond pays 100% of its face value at maturity) = Click on fx on the formula bar (or click Insert and then Function). This gives you the "Insert Function" dial a bond's price, use the PRICE function (found in the "Financial" category of the "Insert Function dialog box function returns the price per $100 dollars of face value. Suppose the going interest rate changed from 10%, falling to 5% or rising to 15%.
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This note was uploaded on 06/15/2011 for the course FI515 FI515 taught by Professor Fi515 during the Spring '10 term at Keller Graduate School of Management.

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FM12 Ch 05 Tool Kit - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15...

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