Lecture 7 Ch 8 UGBA 103 2011

Lecture 7 Ch 8 UGBA 103 2011 - Chapter 8 Valuing Bonds Bond...

This preview shows pages 1–11. Sign up to view the full content.

Chapter 8 Valuing Bonds

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Bond Terminology Bond Certificate § States the terms of the bond Maturity Date § Final repayment date Term § The time remaining until the repayment date Coupon § Promised interest payments
Bond Terminology Face Value § Notional amount used to compute the interest payments Coupon Rate § Determines the amount of each coupon payment, expressed as an APR Coupon Payment

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Zero-Coupon Bonds Zero-Coupon Bond § Does not make coupon payments § Always sells at a discount (a price lower than face value), so they are also called pure discount bonds § Treasury Bills are U.S. government zero-coupon bonds with a maturity of up to one year.
Zero-Coupon Bonds Suppose that a one-year, risk-free, zero-coupon bond with a \$100,000 face value has an initial price of \$96,618.36. The cash flows would be: § Although the bond pays no “interest,” your compensation is the difference between the initial price and the face value.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Yield to Maturity for Zero-Coupon Bonds § For the one-year (i.e., n = 1) zero coupon bond: § Thus, the YTM is 3.5%.
Yield to Maturity for Zero-Coupon Bonds Yield to Maturity of an n -Year Zero-Coupon Bond § Note that you can calculate the yield to maturity of an n-year zero-coupon bond with an ordinary (not financial, not graphing) calculator.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Zero-Coupon Bonds Risk-Free Interest Rates § A default-free zero-coupon bond that matures on date n provides a risk-free return over the same period. Thus, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity on such a bond. § Risk-Free Interest Rate with Maturity n
Risk-Free Interest Rates Spot Interest Rate § Another term for a default-free, zero-coupon yield Zero-Coupon Yield Curve § A plot of the yield of risk-free zero-coupon bonds as a function of the bond’s maturity date

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Coupon Bonds Coupon Bonds § Pay face value at maturity § Pay regular coupon interest payments Treasury Notes
This is the end of the preview. Sign up to access the rest of the document.

Lecture 7 Ch 8 UGBA 103 2011 - Chapter 8 Valuing Bonds Bond...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online