Ch8_ Bond Valuation and Risk

# Ch8_ Bond Valuation and Risk - Chapter8 Bonds (i.e C C C...

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Financial Markets and Institutions Chapter 8 Bond Valuation and Risk

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Financial Markets and Institutions Bond Valuation Process Bonds The appropriate bond price reflects the present  value of the cash flows generated by the bond (i.e.,  interest payments and repayment of principal): n k C k C k C PV ) 1 ( Par .... ) 1 ( ) 1 ( bond of 2 1 + + + + + + =
Financial Markets and Institutions Computing the Current Price of A Bond  A 2-year bond has a par value of \$1,000 and a  coupon rate of 5 percent. The prevailing  annualized yield on other bonds with similar  characteristics is 7 percent. What is the ?appropriate market price of the bond 84 . 963 07 . 1 050 , 1 07 . 1 50 ) 1 ( Par .... ) 1 ( ) 1 ( bond of 2 2 1 = + = + + + + + + = n k C k C k C PV

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Financial Markets and Institutions Bond Valuation Process (cont’d) Valuation of bonds with semiannual  payments First, divide the annual coupon by two Second, divide the annual discount rate by two Third, double the number of years n k C k C k C PV 2 2 1 ) 2 / 1 ( Par 2 / .... ) 2 / 1 ( 2 / ) 2 / 1 ( 2 / bond of + + + + + + =
Financial Markets and Institutions Computing the Current Price of A Bond  With Semiannual Coupons      A 2-year bond has a par value of \$1,000 and  a semiannual coupon rate of 5 percent. The  prevailing annualized yield on other bonds  with similar characteristics is 7 percent.  What is the appropriate market price of the  bond? 27 . 963 035 . 1 025 , 1 035 . 1 25 035 . 1 25 035 . 1 25 ) 2 / 1 ( Par 2 / .... ) 2 / 1 ( 2 / ) 2 / 1 ( 2 / bond of 4 3 2 1 2 2 1 = + + + = + + + + + + = n k C k C k C PV

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Financial Markets and Institutions Relationship between Coupon Rate,  Required Return, and Price Discount Bond:  Coupon rate < Required rate of return Par value Bond: Coupon rate  = Required rate of return Premium Bond: Coupon rate > Required rate of return
Financial Markets and Institutions Relationship between Coupon Rate,  Required Return, and Price \$0.00 \$200.00 \$400.00 \$600.00 \$800.00 \$1,000.00 \$1,200.00 \$1,400.00 \$1,600.00 \$1,800.00 0.05 0.08 0.1 0.12 0.15 Required Return Present Value 5-Year Bond 10-Year Bond 20-Year Bond

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Ch8_ Bond Valuation and Risk - Chapter8 Bonds (i.e C C C...

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