Chapter 07 - CHAPTER7 Whatisabond Keyfeaturesofbonds...

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    7-1 CHAPTER 7 Bonds and Their Valuation What is a bond Key features of bonds Bond valuation Measuring yield Assessing risk
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    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.
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    7-3 Zero Coupon Bond (Bond A) Company MNO will pay the  bearer of this bond  certificate: S$1,000 on Dec 31, 2010
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    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
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    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
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    7-6 What return would you earn? Time Line: $1000 0 1 2 4 I% = ? -$900 3
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    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 + =
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    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
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    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 + + + - = + + + + + + + + =
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    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
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    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
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    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
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    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.
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    7-14
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Chapter 07 - CHAPTER7 Whatisabond Keyfeaturesofbonds...

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