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

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

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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
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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
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