Bond Value and Yields 2

Bond Value and Yields 2 - Bond Value and Yields If the...

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Bond Value and Yields If the bond’s required rate of return decreases , the bond’s price will increase. If the rate is less than the coupon rate , the bond will sell for more than the face value. Why? Investors are willing to pay a premium to buy these above- market cash flows. This is called a premium bond . 1
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Bond Value and Yields If the bond’s required rate of return increases , the bond’s price will decrease. If the rate is more than the coupon rate , the bond will sell for less than the face value. Why? Investors will be willing to buy this bond only if they can do so at a discount. Why would investors pay full price for below-market cash flows? This is called a discount bond . 2
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Valuing A Premium Bond If the required rate of return is different than the coupon rate, the bond will sell for a premium or a discount: $1,000 face value 10% coupon rate Semi-annual coupon payments Matures in 8 years 8% required rate of return 3 $1,116.52 0.04) (1 $1,000 0.04) (1 1 - 1 0.04 $50 Bond of Value 16 16 = + + + =
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Bond Value and Yields 2 - Bond Value and Yields If the...

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