# Chapter 07 - CHAPTER7 Whatisabond Keyfeaturesofbonds...

This preview shows pages 1–15. Sign up to view the full content.

7-1 CHAPTER 7 Bonds and Their Valuation What is a bond Key features of bonds Bond valuation Measuring yield Assessing risk

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

View Full Document
7-2 What is a bond? A long-term debt instrument in which  a borrower agrees to make payments  of principal and interest, on specific  dates, to the holders of the bond.
7-3 Zero Coupon Bond (Bond A) Company MNO will pay the  bearer of this bond  certificate: S\$1,000 on Dec 31, 2010

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

View Full Document
7-4 Coupon Bond (Bond B) Company MNO will pay the bearer of  this bond certificate: S\$1,000, on Dec 31, 2010 And the following coupons: \$30 30/06/09 \$30 31/12/09 \$30 30/06/10 \$30 30/06/07 \$30 31/12/07 \$30 30/06/08 \$30 31/12/08 \$30 31/12/10
7-5 Question: If you paid \$900 for Bond A: How much return would you earn?  (annual compounding) 31/12/06: You Co. MNO \$900 Bond A 31/12/10: You Co. MNO Bond A \$1000

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

View Full Document
7-6 What return would you earn? Time Line: \$1000 0 1 2 4 I% = ? -\$900 3
7-7 What return would you earn? Solves the equation for I. Hard to solve without a financial calculator  or spreadsheet. (ans: 2.67%) INPUTS OUTPUT N I/YR PMT PV FV 4 2.67 0 1000 -900 ( 29 4 1 900 1000 I + =

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

View Full Document
7-8 What is the return for Bond B if  you paid \$900 for it? Time Line: \$1030 0 1 2 8 I%/2 = ? -\$900 3 4 5 6 7 \$30 \$30 \$30 \$30 \$30 \$30 \$30
7-9 What return would you earn? Solves the equation for I. Hard to solve without a financial calculator  or spreadsheet (ans: 9.03%) INPUTS OUTPUT N I/YR PMT PV FV 8 4.52 30 1000 -900 ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 8 8 8 8 2 2 1 1000 2 1 1 1 2 30 2 1 1000 2 1 30 2 1 30 2 1 30 900 I I I I I I I + + + - = + + + + + + + + =

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

View Full Document
7-10 Key Features of a Bond Par value – face amount of  Issue date – when the bond  was issued. Yield to maturity – nominal rate of return earned on  a bond held until maturity (also called the “promised yield”).  (e.g. 2.67%, or 9.03%) Company MNO will pay the  bearer of this bond  certificate: S\$1,000 at Dec 31, 2010
7-11 Key Features of a Bond Coupon – amount paid by the  interest rate (generally fixed)  paid by the issuer.  Multiply by  par value to get dollar  payment of interest. Coupon = Coupon interest rate * Par Value E.g. \$30 = 6% * \$1000 / 2 Company MNO will pay the bearer of  this bond certificate: S\$1,000, at Dec 31, 2010 And the following coupons: \$30 30/06/09 \$30 31/12/09 \$30 30/06/10 \$30 30/06/07 \$30 31/12/07 \$30 30/06/07 \$30 31/12/08 \$30 31/12/10

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

View Full Document
7-12 What is fixed on a bond  certificate and what is not Fixed on a bond certificate: Par value Coupon interest rate Maturity date Payment frequency Not fixed on a bond certificate: Price of the bond Yield
7-13 How much to pay for a Bond Want a higher return: Pay a lower price for the bond Require only a lower return: Pay a higher price for the bond Price and return (yield) of the bond is  inversely related.

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

View Full Document
7-14
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 54

Chapter 07 - CHAPTER7 Whatisabond Keyfeaturesofbonds...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online