wk4 - E Week 4 Tutorial m i l y L o Bonds Debt security...

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Week 4 Tutorial E m i l y L o
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Bonds Debt security instrument to borrow money Face Value – Principal Coupon rate – interest rate offered by the issuer Time to maturity Yield to maturity – market interest rate
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Call provisions Call provisions allows the issuer to buy back bonds before maturity When will a bond be called back? - Coupon rate > Market rate - so firms can buy back the bonds and reissue them at a lower coupon rate Since investors have to sell their bonds back to the issuer whenever it is called, Bonds with callable features are cheaper than bonds with non callable features
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Sinking fund provisions Firms are required to pay a certain amount to a sinking fund each year to retire a proportion of the face value Sinking fund reduces the default risk of issuer Bonds with sinking fund provisions are more expensive
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Bond Valuation Coupon = Face Value x coupon rate/n n=frequency of compounding PV of Bond = PV of coupon payments + PV of
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