{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ch%207%20(Bond%20Valuation)[1]

# ch%207%20(Bond%20Valuation)[1] - 7 Interest Rates and Bond...

This preview shows pages 1–5. Sign up to view the full content.

7 Interest Rates and Bond Valuation Slide 7- 1 ± Valuation There are different types of investment, including bonds, stocks, and projects. All valuation problems are the same: Establishing the value today of future cash flows is the central problem of corporate finance. We’ll talk about bonds valuation first, which is the easiest. Valuation Problems

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Slide 7- 2 ± Definition A bond is a debt security that obligates the issuer (i.e., the seller) to make specified payments to the bondholder (e.g., the buyer). Bonds typically have the following characteristics: Par value (or face value): The principal amount of a bond that is repaid at the end of the term. Coupon : The bondholder receives an interest payment each period until the bond matures, which are coupon payments. The annual coupon payment is determined as a percentage of face value. This percentage is the coupon rate . Maturity : The specified date on which the principal amount of a bond is paid. Price : The amount the bondholder pay today to acquire the bond. Bond Characteristics Slide 7- 3 ± Bond Cash flows Coupon payments (C) + Par value at maturity (Par): ± Pricing a Bond: Two steps Determine the cash flows (size and timing) Calculate the aggregate present value of the cash flows. Bond Value = PV of coupons + PV of par (annuity) (lump sum) 0 1 2 3 C C C C t C + Par Bond Valuation