Chapter 7 Powerpoint

# Chapter 7 Powerpoint - FIN 3403 CHAPTER 7 Bonds and Their...

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FIN 3403 Module 3 - Chapter 7 Page 1 CHAPTER 7 Bonds and Their Valuation Bonds and Their Valuation Valuation FIN 3403 - Business Finance Basics Yields, Discounts, and Premiums Term Structure Risk and Duration Bond Issuers ± Treasury bonds ± Corporate bonds ± Municipal bonds ± Foreign bonds

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FIN 3403 Module 3 - Chapter 7 Page 2 Bonds Types ± First mortgage bonds ± Second mortgage bonds ± Debentures ± Subordinated debentures ± Zero coupon bonds ± Income bonds ± Convertible bonds Bonds: Terminology ± Bond ± Par value ± Maturity ± Coupon interest rate ± Coupon payment ± Bond rating ± Call provision ± Sinking fund Bond Symbols I = Interest M = Maturity value N = Number of periods N = Number of periods V B = Value of the bond r D = Required / discount / YTM rate
FIN 3403 Module 3 - Chapter 7 Page 3 Bond Cash Flows 0 1 2 N VC F 1 CF 2 CF N r = i Per PV = + + … + CF 1 CF 2 CF N (1+r) 1 (1+r) 2 (1+r) N Bond Cash Flows 0 1 2 N V Coupon Coupon Coupon r = i Per = r D /2 Maturity PV = + +…+ + Coupon Coupon Coupon Maturity (1+r) 1 (1+r) 2 (1+r) N (1+r) N Bond Valuation ± There is an inverse relationship between the required rate and the price of the bond. r D > Coupon rate V < \$1,000 r D = Coupon rate V = \$1,000 r D < Coupon rate V > \$1,000

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FIN 3403 Module 3 - Chapter 7 Page 4 Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 = 12% V < \$1 000 r D 12% V < \$1,000 V = [\$50][PVIFA 6%,10 ] + [\$1,000][PVIF 6%,10 ] V = \$368.00 + \$558.40 = \$926.40 Inputs 10 6 50 1,000 N I/YR PV PMT FV Calculation Using the 10B ± Clear All Outputs -926.40 There is no reason not to price both the coupon and maturity payments at the same time using i Per . Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 r D = 10% V = \$1 000 10% V \$1,000 V = [\$50][PVIFA 5%,10 ] + [\$1,000][PVIF 5%,10 ] V = \$386.09 + \$613.91 = \$1,000.00
FIN 3403 Module 3 - Chapter 7 Page 5 Bond Valuation 5-Year bond: N = 10 Coupon rate = 10%: I = \$50 = 8% V > \$1 000 r D 8% V > \$1,000 V = [\$50][PVIFA 4%,10 ] + [\$1,000][PVIF 4%,10 ] V = \$405.54 + \$675.56 = \$1,081.11 Bonds and Their Valuation Valuation FIN 3403 - Business Finance Basics Yields, Discounts, and Premiums Term Structure Risk and Duration Yield to Maturity ± A bond’s yield to maturity (YTM), also called the “promised yield”, is the rate of return which will be earned if the bond is held to maturity.

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FIN 3403 Module 3 - Chapter 7 Page 6 Yield to Maturity ± Since bonds have a known cash flow (they are called fixed-income securities), we assume that they are always in equilibrium and that their YTM is also equal to the investors’ required rate of return.
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## This note was uploaded on 01/11/2012 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Chapter 7 Powerpoint - FIN 3403 CHAPTER 7 Bonds and Their...

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