Chapter6nt[1] - Chapter 6 Valuing Bonds 1 Chapter 6...

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1 Chapter 6 Valuing Bonds
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2 Chapter 6 Learning Goals LG1: Describe bond characteristics LG2: Identify various bond issuers and their motivation for issuing debt LG3: Read and interpret bond quotes LG4: Compute bond prices using present value concepts LG5: Explain the relationship between bond prices and interest rates LG6: Compute bond yields LG7: Find bond ratings and assess the effect of credit risk on bond yields LG8: Assess bond market performance
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3 We hear a lot about the stock market in the popular press, but not much about the bond market It may surprise you to learn that the U.S. bond market is over twice the size of the U.S. stock market Total outstanding debt in 2007: $29.2 trillion Total market value of common stock: $14.2 trillion In general, bonds are less risky than stocks But, like all assets, high-yield bonds have higher risk
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4 Bond Market Overview Bond Characteristics Bonds are debt obligations Corporations Federal government and federal agencies States and local governments Bonds are also known as fixed-income securities Amount and timing of cash flows are known For the issuer, the bond is a loan that requires regular interest payments and repayment of the borrowed principal
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5 The precise terms of a bond issue are outlined in the indenture Maturity date Par value (also called face value), usually $1,000 Interest rate Any property pledged as collateral Steps the bondholder can take in event of default
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6
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7 Call feature Allows the issuing firm to refinance when interest rates fall The issuer “calls” the bonds back prior to maturity Pays the principal plus a call premium, which is usually one year’s worth of interest payments
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8 Coupon Rate The bond’s interest rate is called a coupon rate The name “coupon” is an artifact of history, when bonds were issued with a coupon book. Every six months the bearer tore out the relevant coupon and sent it to the company, who would send the interest payment Now, bond owners are registered with the company. Interest payments are wired to the owner’s account The coupon rate is listed on the bond as a percentage of par value and determines the dollar amount of interest paid to bondholders A 5 percent coupon rate pays 5 percent of $1000 (or $50) each year, or $25 every six months
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9 When first issued, bonds sell at par value Bond prices change as interest rates and firm risk change When the bonds trade among investors in the secondary market, the price will likely differ from par value Corporate bond prices are quoted in terms of percent of par Examples: a bond worth $1,150 would be listed at 115, while a bond worth $870 is quoted as 87
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See Interactive Example 6-1 (move the cursor to the highlight area, right click your mouse and click Open Hyperlink). You can view this and other interactive examples in other
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Chapter6nt[1] - Chapter 6 Valuing Bonds 1 Chapter 6...

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