15.1 - BOND VALUATIONS PART ONE What is a Bond?...

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BOND VALUATIONS PART ONE
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What is a Bond? debt  security When you buy a bond you are  lending money  to  the entity issuing the bond In return you are paid  interest  over the life (term)  of the bond, and  when it matures you get your  principle investment back
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NEW ISSUE – 10 YRS AN 8%, 10 YEAR $10,000  GOVERNMENT OF CANADA BOND YOUR CASH FLOW:  IN 10 YEARS $10,000 INTEREST EVERY YEAR OF $800
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ONE YEAR LATER – 9 YRS BONDS YIELD 10% WOULD ONE BUY THIS 8%, 9 YEAR  $10,000 CANADA BOND FOR  $10,000 $9,500 $7,000 $800/$8,000 = 10.0%
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TWO YEAR LATER – 8 YRS BONDS YIELD 6% WOULD ONE TRADE THIS 8%, 8 YEAR  $10,000 CANADA BOND FOR  $10,000 $9,500 $14,000 $800/$13,333 = 6.0%
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MAJOR RELATIONSHIP INTEREST RATES GO UP PRICE OF BONDS GO DOWN INTEREST RATES GO DOWN PRICE OF BONDS GO UP
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Bond Valuation
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Valuation of Bonds The value of a bond is made up of 2  parts: PV of the  interest payments  (an annuity)  PV of the  principal payment  (a lump sum) PPT 10-5
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This note was uploaded on 11/13/2011 for the course CIVE 2*** taught by Professor - during the Spring '11 term at Carleton CA.

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15.1 - BOND VALUATIONS PART ONE What is a Bond?...

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