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Chapter 7_S

# Chapter 7_S - Chapter 7 Interest Rates and Bond Valuation...

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1 Chapter 7: Interest Rates and Bond Valuation Bond and Bond Valuation More about Bond Features Some Different Types of Bonds Bond Markets Inflation and Interest Rates Determinants of Bond Yields

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2 Bond Definitions Bond : debt securities issued by a corporation or government. Par value (face value): the principal amount of a bond that is repaid at the end of the term. Coupon payment: the stated interest payment made on a bond. Coupon rate: coupon quoted as a percent of face value. Maturity date: the specified date on which the principal amount of a bond (face value) is paid. Yield or Yield to maturity: the interest rate required in the market on a bond. It is the required market rate that makes the discounted cash flows from a bond equal to the bond’s market price.
3 Example of Bond Cash Flows A 10-year bond with 8% annual coupon and \$1,000 face value Annuity Lump Sum Annuity + Lump Sum

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4 Bond Valuation Bond Value = PV of annuity + PV of lump sum Bond Value = PV of coupons + PV of par (face value) Remember, as interest rates increase present values decrease So, as interest rates increase, bond prices decrease and vice versa t t r) (1 F r r) (1 1 - 1 C Value Bond + + + = PV of annuity PV of lump sum
5 Valuing a Discount Bond with Annual Coupons Consider a bond with a coupon rate of 10% and annual coupons. The par value is \$1,000 and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond? Using the formula: Using the calculator:

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6 Valuing a Discount Bond with Annual Coupons Consider a bond with a coupon rate of 10% and annual coupons. The par value is \$1,000 and the bond has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond? Using the formula: B = PV of annuity + PV of lump sum B = 100[1 – 1/(1.11) 5 ] / .11 + 1,000 / (1.11) 5 B = 369.59 + 593.45 = 963.04 Using the calculator: N = 5; I/Y = 11; PMT = 100; FV = 1,000 CPT PV = -963.04 Discount Bond
Valuing a Premium Bond with Annual Coupons Suppose you are looking at a bond that has a 10% annual coupon and a face value of \$1000. There are 20 years to maturity and the yield to

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Chapter 7_S - Chapter 7 Interest Rates and Bond Valuation...

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