3. FIN 301-F08 Lab 3 Bonds

# 3. FIN 301-F08 Lab 3 Bonds - Corporate Debt: Bonds...

This preview shows pages 1–8. Sign up to view the full content.

Corporate Debt: Bonds Session goals: Bond Valuation and Duration

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

View Full Document
Bond Definitions Bond Par value (face value) Coupon rate Coupon payment Maturity date Yield or Yield to maturity 2
3 Bonds basics Issuer  borrower (corporations or government) Investor   lender = bondholder Face Value/Par Value (F)  =  the amount of the loan to the issuer.  It is to be paid back to the bondholder at maturity. Coupon Rate   (r )   = the promised annual rate of interest.  It is normally fixed at issuance for the life of the bond Interest is usually paid semiannually Maturity  = date on which the investor's principal will be repaid.  A bond does not have to be held to maturity; sell at any time. Yield to Maturity (YTM) :  market interest rate for bonds     Bonds =  fixed-income securities  (the cash flows are fixed)

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

View Full Document
4 Bonds - Cash Flows Cash flows Annuity component (the coupons) Lump sum (the face value paid at maturity):    F= \$1,000 Pure discount (zero-coupon) bonds: no coupons    0        1         2              T-2       T-1       T C         C                C         C       C +\$1,000 ( 29 ( 29 T T r 1 1 F r 1 1 1 r C P + + + - =
5 Example of Coupon Payments (C) Example:  Semi-annual coupon  bond with  r =10%  year a   in   Coupons   of Frequency  Rate   Coupon  Value Face (C)   Coupon × =    0        1         2                T-2       T-1         T C         C                C         C       C+\$1,000 \$50 2 10% \$1,000 C = × =

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

View Full Document
6 Bond Value Over Time After the bond is sold at face value, the discount rate  varies with the prevailing interest rate but coupon rates  are fixed. Consider a Telus bond with a 10% coupon rate After purchase of the bond, the interest rate on bonds  with similar risk increases to 11% As the discount rate increases the bond price  decreases and vice versa. Remember, higher discount  rate leads to lower present value. ( 29 ( 29 T T r 1 1 F r 1 1 1 r C P + + + - =
7 Valuation Example Consider a 15-year bond with 8% semi-annual  coupons and \$1,000 par value What will be the price of the bond if the discount rate is  6% (APR, compounded semiannually)? What will be the price of the bond if the discount rate is

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

### Page1 / 29

3. FIN 301-F08 Lab 3 Bonds - Corporate Debt: Bonds...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online