98
Business Finance
Lecture 18
Review of the Previous Lecture
•
Bonds
–
Basic Terminology
–
Bond values and Yields
Topics under Discussion
•
Valuing Bonds
–
Discount bonds
–
Premium bonds
–
Semiannual Coupons
•
Interest Rate Risk
•
Finding Yield to Maturity
Valuing a Bond
•
Assume you have the following information.
BMN, Inc. bonds have a $1000 face value
The promised annual coupon is $100
The bonds mature in 20 years
The market’s required return on similar bonds is 10%
Valuing a Bond
–
present value of the face value
= $1000 x [1/1.10
20
] = $1000 x .14864 = $148.64
–
present value of the coupon payments
= $100 x [1  (1/1.10
20
)]/.10 = $100 x 8.5136 = $851.36
The value of each bond = $148.64 + 851.36 = $1000
Valuing a Bond : A Discount Bond
•
Assume you have the following information.
BMN, Inc. bonds have a $1000 face value
The promised annual coupon is $100
The bonds mature in 20 years
The market’s required return on similar bonds is 12%
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Valuing a Bond : A Discount Bond
–
present value of the face value
= $1000 x [1/1.12
20
] = $1000 x .10366 = $103.66
–
present value of the coupon payments
= $100 x [1  (1/1.10
20
)]/.10 = $100 x 7.4694 = $746.94
–
Value of each bond = $103.66 + 746.94 = $850.60
Valuing a Bond : A Premium Bond
•
Assume you have the following information.
BMN, Inc. bonds have a $1000 face value
The promised annual coupon is $100
The bonds mature in 20 years
The market’s required return on similar bonds is 8%
Valuing a Bond : A Premium Bond
–
present value of the face value
= $1000 x [1/1.08
20
] = $1000 x .21455 = $214.55
–
present value of the coupon payments
= $100 x [1  (1/1.08
20
)]/.08 = $100 x 9.8181 = $981.81
–
Value of each bond = $214.55 + 981.81=$1,196.36
Bond Price Sensitivity to YTM
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 Spring '11
 NA
 Interest Rates

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