104
Business Finance
Lecture 19
Review of the previous Lecture

Valuing Bonds
z
Discount bonds
z
Premium bonds
z
Semiannual Coupons

Interest Rate Risk
Topics under Discussion

Bond price Theorems

Finding Yield to Maturity

Debt vs Equity

Bond Indenture
z
Terms of a bonds
z
Security
Bond Pricing Theorems

The following statements about bond pricing are
always
true.
z
1. Bond prices and market interest rates move in opposite
directions.
z
2. When a bond’s coupon rate is (greater than / equal to / less than) the market’s required
return, the bond’s market value will be (greater than / equal to / less than) its par value.
Bond Pricing Theorems

The following statements about bond pricing are
always
true.
z
3. Given two bonds identical but for maturity, the price of the longerterm bond will change
more than that of the shorterterm bond, for a given change in market interest rates.
z
4. Given two bonds identical but for coupon, the price of the lowercoupon bond will
change more than that of the highercoupon bond, for a given change in market interest
rates.
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105
Finding the Yield to Maturity

We have seen that the price of a bond can be written as the sum of its annuity and lump sum
components.

Knowing that there is an $80 coupon rate for 6 years and a $1000 face value, the price of the
bond is:
$995.14 = $80 x [1 – 1/(1 + r)
6
]/r + 1000 / (1 + r)
6
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 Spring '11
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 BOND PRICING THEOREMS, Bond Price Theorems

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