Chapter07 - Chapter 7 Bonds and Their Valuation Learning...

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Unformatted text preview: Chapter 7 Bonds and Their Valuation Learning Objectives After reading this chapter, students should be able to: List the four main classifications of bonds and differentiate among them. Identify the key characteristics common to all bonds. Calculate the value of a bond with annual or semiannual interest payments. Calculate the yield to maturity, the yield to call, and the current yield on a bond. Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice versa. Differentiate between interest rate risk, reinvestment rate risk, and default risk. List major types of corporate bonds and distinguish among them. Explain the importance of bond ratings and list some of the criteria used to rate bonds. Differentiate among the following terms: Insolvent, liquidation, and reorganization. Read and understand the information provided on the bond market page of your newspaper. Chapter 7: Bonds and Their Valuation Learning Objectives 141 Lecture Suggestions This chapter serves two purposes. First, it provides important and useful information on bonds per se. Second, it provides a good example of the use of time value concepts, so it reinforces the topics covered in Chapter 2. We begin our lecture with a discussion of the different types of bonds and their characteristics. Then we move on to how bond values are established, how yields are determined, the effects of changing interest rates on bond prices, and the riskiness inherent in different types of bonds. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 7, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the Lecture Suggestions in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 4 OF 58 DAYS (50-minute periods) 142 Lecture Suggestions Chapter 7: Bonds and Their Valuation Answers to End-of-Chapter Questions 7-1 From the corporations viewpoint, one important factor in establishing a sinking fund is that its own bonds generally have a higher yield than do government bonds; hence, the company saves more interest by retiring its own bonds than it could earn by buying government bonds. This factor causes firms to favor the second procedure. Investors also would prefer the annual retirement procedure if they thought that interest rates were more likely to rise than to fall, but they would prefer the government bond purchase program if they thought rates were likely to fall. In addition, bondholders government bond purchase program if they thought rates were likely to fall....
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Chapter07 - Chapter 7 Bonds and Their Valuation Learning...

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