Day 5-Part 3

Day 5-Part 3 - Business Management 301 Day 5: Part 3...

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Unformatted text preview: Business Management 301 Day 5: Part 3 Chapter 6: Part 1—Bond Valuation July 5, 2011 Warm-Up Question: What are They Worth? Suppose you were promised the following cash flow: \$100 in one year, \$100 in two years, \$100 in three years, \$100 in four years, \$100 in five years, and \$1000 also in five years. What would these be worth to you if you discounted them at 12%? FV= 1000 PV= ? PMT = 100 I/Yr= 12 N = 5 PV : -\$927.90 Calculator Keystrokes: 1)0 CF j –Flash 0 2)100 CF j –Flash 1 3)100 CF j –Flash 2 4)100 CF j –Flash 3 5)100 CF j –Flash 4 6)1100 CF j –Flash 5 7)12 I/YR 8) 2 nd Function NPV 9)Answer: -\$927.90 A n o t h e r W a y t o S o l v e Characteristics of Bonds Bonds pay fixed coupon (interest) payments at fixed intervals (usually every 6 months in the U.S.) and pay the par value at maturity . 1 1 2 2 . . . . . . n n \$I \$I \$I \$I \$I \$I+\$P Security Valuation KNOW THIS! In general, the value of any asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return . Bond Valuation Simply discount the cash flows at the investor’s required rate of return. Most bonds combine two cash flows: 1) Annuity: the coupon payment stream 2) Single Sum: the par value payment [@ maturity] PV Bond Valuation V b : the value of the bond n: the sum over all the periods of the bond’s life \$I t : the coupon interest payment k b : the investor’s required rate of return (which depends on the riskiness of the bond) \$FV: face value to be paid at maturity V b = \$I t \$FV (1 + k b ) t (1 + k b ) n t = 1 n + ∑ Example: AT&T 10s of 2014 0 0 1 1 2 2 3 3 \$100 \$100 \$100+\$1000...
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This note was uploaded on 11/17/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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Day 5-Part 3 - Business Management 301 Day 5: Part 3...

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