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Unformatted text preview: Business Management 301 Day 5: Part 2.2 Chapter 6: Part 1—Bond Valuation July 5, 2011 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 Par Value: $1000 Coupon: 10% of par value per year =$100 per year [use annual pmts] Maturity: 3 years [current year is 2011] Issuer: AT&T What is the Value of the ATT Bond? AT&T Bond Data: Annual Payments Par Value: $1000 (Assume $1000 if not given) Coupon Rate: 10% (Pmt calculated from Par Value) Maturity: 3 years (2014 – 2011 = 3 years) If Investors Require a 10% Rate of Return, What is the Value? If Investors Require a 12% Rate of Return, What is the Value? Financial Calculator Solution Bonds are a “5 find 4” game Enter the 4 things you know; solve for the fifth. PMT: 100 FV: 1000 I/Yr: 12 N: 3 PV: ? $951.96 Reminder: PV is a negative # (outflow). MakeAFriend Bond Example #1 Peterson Productions has $1,000 par bonds with an annual coupon rate of 7.25% that will mature in another 16 years. If these bonds make semiannual interest payments and the market interest rate is 8%, what price would you be willing to pay for one of these bonds today?pay for one of these bonds today?...
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 Summer '11
 JimBrau
 Management, Annuity, Valuation, YTM

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