BUS 420 Chapter_04

BUS 420 Chapter_04 - Chapter 4 Chapter Bond Valuation 1...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4 Chapter 4 Bond Valuation 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Focus Areas Focus Areas Key features of bonds Bond valuation Measuring yield Assessing risk 2
Background image of page 2
Key Features of a Bond (a) Key Features of a Bond (a) Par value Coupon interest rate Maturity Issue date Default risk 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Call Provision (b) Call Provision (b) Rates declines. Borrowers vs. Lenders. Deferred calls Declining call premium. 4
Background image of page 4
What’s a sinking fund? (b) What’s a sinking fund? (b) Provision to pay off a loan over its life rather than all at maturity. Similar to amortization on a term loan. Reduces risk to investor, shortens average maturity. But not good for investors if rates decline after issuance. 5
Background image of page 5

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

View Full DocumentRight Arrow Icon
Financial Asset Valuation (c) Financial Asset Valuation (c) 6 ) ) PV = CF . . . + CF 1 N 2 (1 + r) 2 CF . 0 1 2 N r CF 1 CF N CF 2 Value ... + + (1 + r) 1 (1 + r) N
Background image of page 6
Value of a 10-year, 10% coupon Value of a 10-year, 10% coupon bond if r bond if r d d = 10% (d) = 10% (d) 7 100 100 0 1 2 10 10% 100 + 1,000 V = ? ... 10 10 100 1000 N I/YR PV PMT FV -1,000 INPUTS OUTPUT
Background image of page 7

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

View Full DocumentRight Arrow Icon
What would happen if expected inflation What would happen if expected inflation rose by 3%, causing r rose by 3%, causing r d = 13%? (e1) = 13%? (e1) 8 10 13 100 1000 N I/YR PV PMT FV -837.21 INPUTS OUTPUT
Background image of page 8
What would happen if inflation What would happen if inflation fell, and r fell, and r d d declined to 7%? (e2) declined to 7%? (e2) 9 10 7 100 1000 N I/YR PV PMT FV -1,210.71 INPUTS OUTPUT
Background image of page 9

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

View Full DocumentRight Arrow Icon
Bond Value ($) vs Years Bond Value ($) vs Years remaining to Maturity remaining to Maturity 10 M 1,372 1,211 1,000 837 775 30 25 20 15 10 5 0 r d = 7%. r d = 13%. r d = 10%.
Background image of page 10
What’s “yield to maturity”? YTM is the rate of return earned on a bond held to maturity. Also called “promised yield.” It assumes the bond will not default. 11
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/14/2012 for the course BUS 420 taught by Professor Poindexter during the Spring '08 term at N.C. State.

Page1 / 36

BUS 420 Chapter_04 - Chapter 4 Chapter Bond Valuation 1...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online