BFIN620_PPT_CH5_sp09-7

BFIN620_PPT_CH5_sp09-7 - 5- 1Bond ValuationBond...

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Unformatted text preview: 5- 1Bond ValuationBond ValuationChapter 5Brealey-Myers-Marcus5thEditionBusiness Finance 6205- 2Topics CoveredBond characteristicsBasic terminologyBond yieldsBond quotesBond pricing techniquesCoupon-paying bondsBond risksInterest rate riskDefault riskOther forms of corporate debt5- 3Bond TerminologyA bondrepresents a loan to a company.When you buy a bond, you are, in effect, loaning the company money.The bond indenturespells out the terms on which the loan is made.The bond legally obligates the issuing company to make certain payments to the bond buyers.The payments include periodic interest income and repayment of the amount loaned (principal) at the end of the loan (bond’s maturity).5- 4Bond TerminologyCouponDollar amount of interest paid to the bond owners at specific intervalsRemains constant for the life of the bondNot all bonds pay coupons.Face ValueDollar amount loaned to the company, which must be repaid by the company at the bond’s maturityIn effect, a bond’s price at both issue and maturityAlso called the par valueor maturity value5- 5Coupon Rate and Bond YieldsCoupon RateThe bond’s annual interest payment, expressed as a fixed percent of the bond’s face valueRemains constant over the life of the bond. Not to be confused with the current yield or the yield to maturity.Current YieldThe bond’s annual interest payment, expressed as a percent of the bond’s market priceAnnual return “at the moment” on the price paid for the bond, regardless of its maturityCan vary over the life of a bond5- 6Coupon Rate and Bond YieldsYield To Maturity (YTM)Interest rate (discount rate) that equates the PV of a bond’s future cash flows (coupon payments and principal repayment) to its current priceIn effect, the average annual rate of returnan investor can expect on the price paid for a bond today – if the bond is held to maturityNot to be confused with a bond’s coupon rate or its current yieldCan vary over the life of the bond5- 7Coupon Rate and Bond YieldsApplicationA 5-year corporate bond with a $1,000 par value pays a $65 annual coupon. If the bond currently trades for $985, what is the bond’s coupon rate? trades for $985, what is the bond’s coupon rate?...
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This note was uploaded on 10/10/2011 for the course BUSINESS 620 taught by Professor Paul during the Spring '11 term at Ohio State.

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BFIN620_PPT_CH5_sp09-7 - 5- 1Bond ValuationBond...

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