Ch14 - ( 1000 ) 1 ( 35 950 20 1 r r T t t + + + = = r =...

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Bond Prices and Yields Chapter 14
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Face or par value Coupon rate Zero coupon bond Indenture Bond Characteristics
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Bond pricing ) 1 ( ) 1 ( 1 r ParValue r C P T T T t t t B + + + = = P B = Price of the bond C t = interest or coupon payments T = number of periods to maturity y = semi-annual discount rate or the semi-annual yield to maturity
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( 29 77 . 148 , 1 $ ) 03 . 1 ( 1000 03 . 1 1 40 20 20 1 = + = = P P t t Price: 10-yr, 8% Coupon, Face = $1,000 C t = 40 (SA) P = 1000 T = 20 periods r = 3% (SA)
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Prices and Yields (required rates of return) have an inverse relationship When yields get very high the value of the bond will be very low. When yields approach zero, the value of the bond approaches the sum of the cash flows. Bond Prices and Yields
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Price Yield Prices and Yield
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Interest rate that makes the present value of the bond’s payments equal to its price. Solve the bond formula for r ) 1 ( ) 1 ( 1 r ParValue r C P T T T t t t B + + + = = Yield to Maturity
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) 1
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Unformatted text preview: ( 1000 ) 1 ( 35 950 20 1 r r T t t + + + = = r = 3.8635% 10 yr Maturity Coupon Rate = 7% Price = $950 Solve for r = semiannual rate Yield to Maturity Example Bond Equivalent Yield 7.72% = 3.86% x 2 Effective Annual Yield (1.0386) 2- 1 = 7.88% Current Yield Annual Interest / Market Price $70 / $950 = 7.37 % Yield Measures Rating companies Moodys Investor Service Standard & Poors Fitch Rating Categories Investment grade Speculative grade Default Risk and Ratings Coverage ratios Leverage ratios Liquidity ratios Profitability ratios Cash flow to debt Factors Used by Rating Companies Sinking funds Subordination of future debt Dividend restrictions Collateral Protection Against Default...
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Ch14 - ( 1000 ) 1 ( 35 950 20 1 r r T t t + + + = = r =...

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