Bonds and Bond Valuation Notes

Bonds and Bond Valuation Notes - Bonds and Bond Valuation...

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Bonds and Bond Valuation Notes CHAPTER ORGANIZATION 7.1 Bonds and Bond Valuation Bond Features and Prices Bond Values and Yields Interest Rate Risk Finding the Yield to Maturity: More Trial and Error 7.2 More on Bond Features Is it Debt or Equity? Long-Term Debt: The Basics The Indenture 7.3 Bond Ratings 7.4 Some Different Types of Bonds Government Bonds Zero Coupon Bonds Floating-Rate Bonds Other Types of Bonds 7.5 Bond Markets How Bonds are Bought and Sold Bond Price Reporting A Note on Bond Price Quotes 7.6 Inflation and Interest Rates Real versus Nominal Rates The Fisher Effect 7.7 Determinants of Bond Yields The Term Structure of Interest Rates Bond Yields and the Yield Curve: Putting It All Together
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7.1. Bonds and Bond Valuation .A Bond Features and Prices Bonds – long-term IOU’s, usually interest-only loans (interest is paid by the borrower every period with the principal repaid at the end of the loan). Coupons – the regular interest payments (if fixed amount – level coupon). Face or par value – principal, amount repaid at the end of the loan Coupon rate – coupon quoted as a percent of face value Maturity – time until face value is paid, usually given in years .B Bond Values and Yields The cash flows from a bond are the coupons and the face value. The value of a bond (market price) is the present value of the expected cash flows discounted at the market rate of interest. Yield to maturity (YTM) – the required market rate or rate that makes the discounted cash flows from a bond equal to the bond’s market price. Bond of Value Face Coupon Annual Yield Coupon = Bond of Value Market Coupon Annual Yield Current
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Bond value = PV of coupons + PV of face value .C Interest Rate Risk Interest rate risk – changes in bond prices due to fluctuating interest rates. All else equal, the longer the time to maturity, the greater the interest rate risk.
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This note was uploaded on 01/20/2012 for the course FIN 310 taught by Professor Staff during the Fall '11 term at The University of Akron.

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Bonds and Bond Valuation Notes - Bonds and Bond Valuation...

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