Bond_Valuation - BondValuation Bond government...

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Bond Valuation
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Bond Long-term promissory notes issued by business or  government Benefit of holding bond Coupon payment every year (or semiannual) Principal repayment at maturity
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Classified of Bond Interest-bearing bond or Coupon Bond Coupon payment periodically PAR redemption at maturity Zero coupon bond (sold at discount) Only PAR redemption at maturity
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Value Concept Book Value the price of an asset minus its accumulated  depreciation BV does not necessarily fairly represent the actual  market value of the asset
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Value Market Value the buying/selling price calculated as a weighted  average of everybody’s intrinsic value Intrinsic Value: present value of the future cash flows at the  investor’s required rate of return different investors have different perception and  expectation; therefore, IV is unique to each  individual
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Value Determination 1. What are the expected cash flows?  (CFt) 2. When will the cash flows occur? (t) 3. What is the required rate of return for this  particular stream of cash flows?  (i) V = Σ t=1 n (1+i) t CF t
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Value of bond present value of the future cash flows at the  investor’s required rate of return PV annuity for periodic coupon payment + PV of  PAR at maturity V b   = k d C (1+k d ) n PAR (1+k d ) n 1 - 1 +
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Using PV Function = - PV(Rate,Nper,Pmt,FV,Type) Rate   required rate of return (K d ) Nper   number of period to maturity (n) Pmt  periodic coupon payment (C) FV   PAR value
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