Chapter 7.1: Bond Valuation Bonds are usually interest only loans – borrow pays interest over the period and doesn’t pay principal until the end Coupon – the stated interest payment made on a bond Level Coupon bond – bond with constant coupon payments Par value (face value) – amount the will be repaid at the end of the loan Coupon rate – annual coupon divided by the face value Maturity – number of years until the face value must be paid When interest rates rise the present value of the bonds remaining cash flows declines and the bond is worth less (vice versa) Yield to Maturity – interest rate required in the market on a bond Bond cash flows usually have an annuity and lump sum payment o So we calculate the market value of the bond by getting the PV of these two and adding them together Discount bond – sells for less than face value o This happens when market interest rates rise above coupon rates Premium bond – sells for more than face value
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This note was uploaded on 12/06/2011 for the course FIN 3134 taught by Professor Ddklock during the Fall '08 term at Virginia Tech.