15.1 bonds solutions[1]

15.1 bonds solutions[1] - 4/12/2010 0011 0010 1010 1101...

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4/12/2010 1 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 15.1 Bonds 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 Bonds 2 Parties involved BORROWER – corporation LENDER – investor Purchaser receives Interest in the form of periodic interest payments Principal returned at maturity 2 Interest rates BOND rate – rate payable on the face value of the bond YIELD rate – prevailing rate of return in the bond market
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4/12/2010 2 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 $1,000 bond at j 2 = 10% for sale market rate: j 2 =10% Purchase price equal to $1,000 market rate: j 2 =20% Purchase price less than $1,000 market rate: j 2 =5% Purchase price more than $1,000 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 2 Interest Rates BOND RATE Let b = periodic coupon rate b is used ONLY to calculate the bond payment Bond payment = Face Value (FV) x periodic coupon rate PMT = FV x b MARKET RATE Let I/Y = market rate (or yield rate) used to calculate purchase price of the bond Purchase Price = P.V. of interest payments + P.V. of Face Value **discounted at market rate**
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4/12/2010 3 4 2 5 1 0011 0010 1010 1101 0001 0100 1011 $1,000 bond at j 2 = 10% is redeemable in 6 years. a) Find the purchase price to yield j 2 = 10%. P.V. of Bond Payments b = .10/2 = .05 PMT = 1,000 x .05 = 50 N = 2 x 6 = 12 I/Y = 10 P/Y = 2 C/Y = 2 FV = 0 CPT PV = -443.16 PP = 443.16 + 556.84 = $1,000 P.V. of Face Value FV = 1,000 PMT = 0 I/Y = 10 P/Y = 2 C/Y = 2 N = 12 CPT PV = -556.84 4 2 5 1 0011 0010 1010 1101 0001 0100 1011
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15.1 bonds solutions[1] - 4/12/2010 0011 0010 1010 1101...

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