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Day 6-Part 1.1

# Day 6-Part 1.1 - Day6:Part1 Chapter6:Part2BondValuation...

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Business Management 301 Day 6: Part 1 Chapter 6: Part 2—Bond Valuation July 7, 2011

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Day 6: Part 1 Agenda 1) POW Review Today 11:00-12:00 W308 2) Group Book Assignments 3) Personal Information Cards 4) Chapter 6: Part 2 5) Break
Chapter 6: Chapter 6: Bond Valuation Bond Valuation

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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]
Yield To Maturity The average annual rate of return investors  expect to receive on a bond if they hold it to  maturity [aka the “promised yield”].  Note:  this is  NOT  the same as the Current  Yield!

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To illustrate the changing YTM on a premium and a discount bond, we  are going to calculate the PV for each of the five remaining years of the  two bonds described below (continued on next two slides). Yield To Maturity Illustration Bond #1 Par Value: \$1000 Semiannual Coupon Coupon Rate: 12% Maturity: 5 years Discount Rate: 10% Calculator Solution FV = \$1000 PV = ? PMT = 60  [0.12 x 1000=120;  120/2=60] N = 10   [5 x 2 =10] I/Yr = 5%   [10/2=5] Bond #2 Par Value: \$1000 Semiannual Coupon Coupon Rate: 8% Maturity: 5 years
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Day 6-Part 1.1 - Day6:Part1 Chapter6:Part2BondValuation...

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