15.1 Bonds[1]

15.1 Bonds[1] - 4/5/2010 15.1 Bonds Bonds 2 Parties...

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4/5/2010 1 15.1 Bonds 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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4/5/2010 2 $1,000 bond at j 2 = 10% for sale market rate: j 2 =10% Purchase price ___ $1,000 market rate: j 2 =20% Purchase price ___ $1,000 market rate: j 2 =5% Purchase price ___ $1,000 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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4/5/2010 3 $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
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15.1 Bonds[1] - 4/5/2010 15.1 Bonds Bonds 2 Parties...

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