unit 5 ebook bond valuation

unit 5 ebook bond valuation - 7-1CHAPTER 7Bonds and Their...

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Unformatted text preview: 7-1CHAPTER 7Bonds and Their ValuationKey features of bondsBond valuationMeasuring yieldAssessing risk7-2What is a bond?A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.7-3Bond marketsPrimarily traded in the over-the-counter (OTC) market.Most bonds are owned by and traded among large financial institutions.Full information on bond trades in the OTC market is not published, but a representative group of bonds is listed and traded on the bond division of the NYSE.7-4Key Features of a BondPar value face amount of the bond, which is paid at maturity (assume $1,000).Coupon interest rate stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest.Maturity date years until the bond must be repaid.Issue date when the bond was issued.Yield to maturity - rate of return earned on a bond held until maturity (also called the promised yield).7-5Effect of a call provisionAllows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor).Borrowers are willing to pay more, and lenders require more, for callable bonds.Most bonds have a deferred call and a declining call premium.7-6What is a sinking fund?Provision to pay off a loan over its life rather than all at maturity.Similar to amortization on a term loan.Reduces risk to investor, shortens average maturity.But not good for investors if rates decline after issuance.7-7The value of financial assetsNN2211r)(1CF ... r)(1CF r)(1CF Value++++++=12Nr%CF1CFNCF2Value...7-8Other types (features) of bondsConvertible bond may be exchanged for common stock of the firm, at the holders option.Warrant long-term option to buy a stated number of shares of common stock at a specified price.Putable bond allows holder to sell the bond back to the company prior to maturity.Income bond pays interest only when interest is earned by the firm....
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This note was uploaded on 07/04/2011 for the course MARKETING AB219 taught by Professor N/a during the Spring '11 term at Kaplan University.

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unit 5 ebook bond valuation - 7-1CHAPTER 7Bonds and Their...

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