06-Bond-valuation-FIN6406

06-Bond-valuation-FIN6406 - Bond Valuation n Key features...

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Bond Valuation  Bond Valuation  11 Bond Valuation n Key features and terminology n Valuation model n Cash flows n Risk n Yield to maturity (YTM) n Yield to call (YTC)
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Bond Valuation  Bond Valuation  22 Key Features of a Bond n Indenture : legal agreement n Issue date : when issued n Maturity date : repayment date n Par value : principal to be repaid n Coupon rate : stated interest rate
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Bond Valuation  Bond Valuation  33 Value = + . . . How can we value assets on the basis of expected future cash flows? CF1 (1 + Rd)1 CF2 (1 + Rd)2 CFn (1 + Rd)n The discount rate (Rd) is the required rate of return or opportunity cost of capital on debt, and is driven by the: n interest rates (in general) n risk of cash flows
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Bond Valuation  Bond Valuation  44 n An annuity (the coupon payments). n A lump sum (the maturity, or par, value to be received in the future). n Value = INT(PVIFARd, n ) + M(PVIFRd, n) The cash flows of a bond consist of:
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Bond Valuation  Bond Valuation  55 0 1 100 1,000 Value = = $1,000 Find the value of a 1-year 10% annual coupon bond when Rd = 10%. $1,100 1.10
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Bond Valuation  Bond Valuation  66 0 10 100 1,000 1 2 100 100 Find the value of a similar 10-year bond.
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Bond Valuation  Bond Valuation  77 Enter: Solve for PV = $1,000 Two Ways to Solve Using tables: Value = INT(PVIFA10%,10)+ M(PVIF10%,10) Calculator: N I/YR PV PMT FV 10 10 100 1000
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Bond Valuation  Bond Valuation  88 Rule: When the required rate of return (Rd) equals the coupon rate, the bond value (or market price) equals the par value.
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06-Bond-valuation-FIN6406 - Bond Valuation n Key features...

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