170F17-9-notes.pdf - MA170 Lab Notes Text References 6.1...

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MA170 Lab Notes Text References: 6.1 - 6.3 Bonds (6.1) A written contract between the issuer (borrower) and the investor (lender) which promises to pay a stated amount (or amounts) of money at some future date (or dates). Lender is paid interest on investment throughout the term of the bond. Notation: 1. F - the face value of the bond (usually a multiple of 100). 2. C - the redemption value C of the bond. 3. n - the number of interest periods until the redemption (maturity) date of the bond. 4. r - the bond rate (or coupon rate) per interest period at which the bond pays interest on its face value. 5. i - the yield rate per interest period at which the investor would like to earn. 6. P - the purchase price of the bond to yield rate i. 7. Fr - the bond interest payment (or coupon) received at the end of each interest period. Purchase Price of a Coupon Bond (6.2) The purchase price of a bond on a bond interest date n interest periods before maturity so that it earns interest at yield rate of i per period is given by P = Fra n i + C (1 + i ) - n . The purchase price is calculated as the sum of the discounted value of the coupon payments (ordinary annuity) and the present value of the redemption value at rate i. An alternative formula (and more e ffi cient) is P = C + ( Fr - Ci ) a n i . NOTE: The formulae above use a periodic yield rate that corresponds to the interest periods. On occassion the yield rate may be stated as a rate that is compounded with a frequency that di ers from the frequency of the interest

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