Fin 390 Chapter7 - Chapter 7 Interest Rates and Bond...

Info icon This preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
7-1 Chapter 7 Interest Rates and Bond Valuation
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter Outline Bonds and Bond Valuation Bond feature Some Different Types of Bonds Bond Markets Inflation and Interest Rates Determinants of Bond Yields 7-2
Image of page 2
Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate and the determinants of bond yields Understand bond ratings and what they mean Understand the impact of inflation on interest rates Understand the term structure of interest rates 7-3
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Bond Definitions Bond – a debt security issued by a company for borrowing money with the following features: Par value (face value) Coupon rate Coupon payment Maturity of time period Yield or Yield to maturity 7-4
Image of page 4
The Bond Pricing Equation A.2 Table r) (1 1 A.3 Table r r) (1 1 - 1 C Value Bond t t + + + = FV 7-5 FV - Par value (face value) C - Coupon payment = FV * coupon rate t - Maturity (or number of periods) r - Yield to maturity Bond Value = PV ( Coupon Annuity) + PV (Par Value)
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Bond Pricing Equation A.2 Table r) (1 1 Value Bond t + = FV 7-6 FV - Par value (face value) t - Maturity (or number of periods) r - Yield to maturity Current yield = Coupon / Price Zero Coupon Bound: C=0
Image of page 6
Premium Bound (Coupon rate > yield to maturity) A bond has a 10% annual coupon and a face value of $1000, 20 years to maturity, and the yield to maturity is 8%. What is the price of this bond? FV = 1000 , t=20 r=8% coupon rate = 10% Coupon payment = 1000*10% =100 Annuity discount factor (t=20, r=8%) = 9.8181 (Table A.3,pA-6) PV (C annuity) = 100 * 9.8181 = 981.81 Discount factor (t=20, r=8%) = 0.2145 (Table A.2, pA-4) PV (Par value) = 1000 * 0.2145 = 214.5 Bound value = 981.81 + 214.5 = 1196.31 Key point : Premium bound: Price (or PV) > Par or Face Value 7-7
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Discount Bond (coupon rate < yield to maturity) A bond with an annual coupon rate of 8%. The par value is $1,000, and the bond has 5 years to maturity. The yield to maturity is 10%. What is the value of the bond? FV =1000, coupon rate = 8%, r=10%, t=5 Coupon payment = 1000*8% = 80 Annuity discount factor (10%, t=5)=3.7908 (Table A.3, pA-6) PV (C Annuity) = 80 * 3.7908 = 303.26 Discount factor (10%, t=5) = 0.6209 (Table A.2, p A-4) PV (Par Value) = 1000 * 0.6209= 620.9 Bound value = 303.26 + 620.9 = 924.16 Key point : Price (or PV) < Par or Face Value 7-8
Image of page 8
Bond Prices Relationship Between Coupon and Yield If YTM > coupon rate, then par value > bond price Why? The discount provides yield above coupon rate Price below par value, called a discount bond If YTM < coupon rate, then par value < bond price Why? Higher coupon rate causes value above par Price above par value, called a premium bond If YTM = coupon rate, then par value = bond price 7-9
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Summary Table 7-10
Image of page 10
Bond Prices with a Spreadsheet There is a specific formula for finding bond prices on a spreadsheet PRICE(Settlement,Maturity,Rate,Yld,Redemption, Frequency,Basis) YIELD(Settlement,Maturity,Rate,Pr,Redemption, Frequency,Basis) Settlement and maturity need to be actual dates The redemption and Pr need to be input as % of par value Click on the Excel icon for an example 7-11
Image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
YTM with Annual Coupons
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern