Exam 3 Tips Chapter 7 Bond Valuation Understand the basic definitions of the terms related to the bond’s typical CFs such as maturity, yield to maturity (YTM), coupon rate, coupon payment, face value (par value). How do you value bonds under the discounted CF approach? Understand relationships between variables. For example, YTM and price of bond, coupon rate and price of bond, time to maturity and price of bond, etc. . Be able to find price of bond, YTM, amount of coupon, or time to maturity when everything else is given. When do you have premium bonds or discount bonds? Relative magnitude of annual coupon rate and YTM. What is price risk as one example of interest rate risks? How is this risk related to time to maturity of the bond and coupon rate? Be careful when you calculate price of bond or YTM between annual coupon payment and semiannual coupon payment. Understand and be able to apply equation YTM=capital gains yield +current yield.
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