bondval - G o a ls B o n d V a lu a tio n Easy valuation...

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1 Bond Valuation Economics 71a: Spring 2007 Mayo Chapter 13 Lecture notes 4.4 Goals Easy valuation Present values Yield Yield to maturity Difficult issues Interest rates Defaults Call options Present Values and Bonds Bond example: Par = 1000 Coupon = 5% = $50 (per year) Required return, k = 7% Maturity = 3 years Bond Example Present Value PV = 50 1.07 + 50 1.07 2 + 1050 1.07 3 PV = 947.51
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2 Bond Pricing Bonds trade at a given price May be above or below your valuation Strategy Buy if price < present value Sell if price > present value Yield Interest/Price Example Par = 1000 Coupon = 5% Current price = 900 Yield = 50/900 = 5.56% Yield to Maturity Required return to get get PV = Price Similar to internal rate of return Requires computer Yield to Maturity 900 = 50 (1+ k) + 50 (1 + k ) 2 + 1050 (1 + k ) 3 k = 8.02%
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3 Semiannual Interest Pays every 6 months Par = 1000 Coupon = 5%, pays (1/2)50 = 25 every 6 months Maturity = 3 years k = 8% (k per 6 months = 4%) Semi-annual Bond PV = 25 (1+ 0.04) i i = 1 5 !
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