{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chap 8_Valuing Bonds - Valuing Bonds Click to edit Master...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
RWJ, Chapter 8 Click to edit Master subtitle style M G M T 5 0 5, Valuing Bonds M G M T 50 5, Fal l
Image of page 1

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

View Full Document Right Arrow Icon
RWJ, Chapter 8 M G MT 505 , Fall 201 1 Security Claimants Firms raise money from the public by typically issuing one of the following three securities: Bonds Stocks Preferred Stock The market in which the firm initially issues the security and gets funds is called the “primary market”. Subsequent trading of these securities happen in the “Secondary Markets” such as the NYSE and NASDAQ. M G M T 5
Image of page 2
RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Par Value Face Value of the bond. Dollar amount received when the bond matures. For most bonds, this is $1,000. Coupon Annual cash-flow received from the bond. Expressed as a percentage of Par Value. Most bonds pay coupons semiannually. Bonds that pay no coupons, and pay only the par value at maturity are called "Zero Coupon" or "pure discount" bonds. Maturity This is the time till the last coupon payment. At maturity, you get the last coupon and the par value. M G M T 5
Image of page 3

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

View Full Document Right Arrow Icon
RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Current Yield Return from coupons for the next period. The ratio of the annual coupon payment as a fraction of current price. Yield to Maturity Annualized return earned by buying the bond today in the market place and holding it till maturity (Assumption: Coupon payments can also be reinvested at the current rate till maturity) Priority If the value of the firm is less than the money owed to the debt holders, the firm is bankrupt. After short term obligations, debt-holders have the first right to the remaining assets in a bankruptcy. Options Bonds can be "Callable“, “Convertible” or both. “Callable” bonds can be retired at the option of the issuer for a predetermined premium over the par value. "Convertible" bonds allow investors to convert the debt for equity in the firm at the investors’ option. M G M T 5
Image of page 4
RWJ, Chapter 8 M G MT 505 , Fall 201 1 Secondary Market Bonds, other than Treasuries (bonds issued by the Federal Reserve), are not very liquid. Most of the trading on bonds take place in the over the counter market or in the NYSE. Most OTC dealers are located in New York. Variable Rate bonds In periods of high interest rates, it is common to see a growth in bonds with "floating" or "variable" interest rates. Other “options” Some bonds are issued with "Warrants“, which allow the investor to buy stock from the company for a specific price. “Putable" bonds allow the investor to sell the bond back to the issuer at par at certain times . Bond Characteristics M G M T 5
Image of page 5

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

View Full Document Right Arrow Icon
RWJ, Chapter 8 M G MT 505 , Fall 201 1 Bond Characteristics Bond Indenture Specifies rights of bond investors, and in general, how the firm can use the proceeds from the issue.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern