CH-7 - GSB 531 Managerial Finance Chapter 7 Interest Rates...

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1 GSB 531 Managerial Finance Chapter 7 Interest Rates and Bond Valuation Contents Bond Basics Bond Valuation Interest Rate Risk Bond Types Bond Ratings Bond Features Bond Markets Interest Rates, Inflation, and Term Structure Bond Basics Coupons (annual, semiannual, …) Face Value, Par Value Zero-Coupon Bond Maturity Coupon Rate = Annual Coupon / Face Value Yield to Maturity (YTM) or “yield”: the interest rate required in the market on a bond.
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2 Example A treasury bond with a $10,000 face value, a coupon rate of 5.25% and a maturity date of Aug. 15, 2003. Annual coupon payment is $10,000 X 5.25% = $525 $525 / 2 = $262.50 An actual coupon payment of $262.50 every six months Semiannual Coupons Finding the Yield to Maturity (YTM)
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3 Bond Valuation Interest Rate Risk The longer the time to maturity, the greater the interest rate risk. The lower the coupon rate, the greater the interest rate risk. Bond Types Government Bond: US Treasury bills, notes, and bonds, no default risk, not subject to state income tax.
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