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lecture 18 - Business Finance Lecture 18 Review of the...

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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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99 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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