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Unformatted text preview: Business Management 201 Day 12 Chapter 6: Part 2—Bond Valuation October 12, 2011 Day 12 Agenda 1) Book Assignment Due in 6½ weeks (Nov 28 @ 5 PM) 2) Women in Finance Workshop Oct 19 67 PM in 710 TNRB 3) POW Quiz #6: Citigroup Case & Duration Exercise— Completed Together in Class on Monday—Due Date Changed to Friday, October 21 at 11:59 PM 4) Next TA Review Sessions this Week: TA Open Lab Session—Thursday 11:00 AM12:00 PM in 3108 JKB TA POW Review Session—Thursday 5:00 PM6:00 PM in 3714 HBLL TA Open Lab Session—Friday 11:00 AM1:00 PM in 184 TNRB 1) Midterm Exam: October 1921—Study Guide Posted 2) Chapter 6: Part 2 Discussion 3) POW #6: Citigroup Case & Duration Exercise Chapter 6: Chapter 6: Bond Valuation Bond Valuation Bond Valuation Simply discount the cash flows at the investor’s required rate of return. Most bonds combine TWO cash flows: 1) Annuity: the coupon payment stream 2) Single Sum: the par value payment [@ maturity] Two Main Types of Bond Questions Question Type 1 : Discount rate is given, find the market price. Question Type 2 : Market price is given, find the discount rate [aka “Yield to Maturity”] . Yield To Maturity The average annual rate of return investors expect to receive on a bond if they hold it to maturity [aka the “promised yield”] . Note: this is NOT the same as the Current Yield! Suppose you paid $898.90 for a $1,000 par , 10% coupon bond with 8 years to maturity and semiannual coupon payments. What is your yield to maturity? YTM MakeaFriend Example #1 Using the Financial Calculator P/YR: 1 Mode: End FV: 1000 PV: 898.90 N: 16 [8 x 2 = 16] PMT: 50 [0.10 x 1000 = 100/2 = 50] I/YR: ? 6% YTM: 12% [6 x 2 = 12] N o t e : N o t e : T h i s i s a n T h i s i s a n i m p o r t a n t s l i d e ! ! i m p o r t a n t s l i d e ! ! Note: You are using a factor of TWO for the semiannual payments so you must double the I/Yr to find YTM! Suppose you paid $768.52 for a $1,000 par , 7% coupon bond with 12 years to maturity and semiannual coupon payments. What is your yield to maturity? YTM MakeaFriend Example #2 Using the Financial Calculator P/YR: 1 Mode: End FV: 1000 PV: 768.52 N: 24 [12 x 2 = 24] PMT: 35 [0.07 x 1000 = 70; 70/2 = 35] I/YR: ? 5.212% YTM: 10.425% [5.212 x 2 = 10.425] Note: You are using a factor of TWO for the semiannual...
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This note was uploaded on 01/06/2012 for the course BUS M 2011 taught by Professor Jennlarson during the Fall '11 term at BYU.
 Fall '11
 JennLarson
 Management, Valuation

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