{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

MGMT310_lecture10

# MGMT310_lecture10 - Lecture 10 Lecture 10 By now we know...

This preview shows pages 1–7. Sign up to view the full content.

Lecture 10 By now we know… Time value of money Need to compare cash flows from different points in time Annuities, Perpetuities, Growing Ann., Growing Perp. Special formulas for determining PV/FV of regular, periodic payments (or payments growing at a fixed rate) Effective interest rates How much interest are we really getting in a certain time period? Appropriate discount rates depending on frequency of CF’s Appropriate discount rates depending on frequency of CF s Are we receiving cash flows monthly, semi annually, annually, etc.? Now let’s apply these concepts to bond (ch.7) and stock (ch.8) valuation!

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

View Full Document
Bonds Bond : a loan made by investors to the issuer . In return for his/her money, the investor receives a legaI claim on future cash flows of the issuer. The issuer promises to: Make regular coupon payments every period until the bond matures Pay the face/par/maturity value of the bond when it matures. Default since bonds are contractual obligations , an issuer who fails to keep them is subject to legal action on behalf of the lenders (bondholders) (bondholders).
Let’s learn some bond features Bonds (that pay coupons) typically make semi annual coupon payments 1. If a bond has a \$1000 face value, five years to maturity, and a coupon rate of 8%, what would its cash flows look like? 2. How much is this bond worth if the yield to maturity is quoted at 10%? (Note: as w/ APRs, the quoted yield is equal to the actual rate per period multiplied by the number of periods) 3. What is the effective annual yield/rate on this bond? 4. Is this bond selling at par value , at a premium , or at a discount ?

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

View Full Document
Bond pricing equation T T F 1 1 r Price = C + 1+ r r = PV of coupons + PV of face val e u where: C = coupon payment F = face value T = number of periods until maturity T number of periods until maturity r = required rate of return (per period)
Bond rates and yields Coupon rate Annual coupon amount expressed as a percentage of the face value Current yield Annual coupon amount divided by the current market price of the bond i ld i ( ) Yield to maturity (YTM) Rate required in the market on a bond Do not confuse current yield w/ YTM !!

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

View Full Document
Bond rates and yields: Example 1. Suppose a bond currently sells for \$932.90. It pays a semi annual coupon of \$35, and it matures in 10 years. It has a face value of \$1000. What are
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• 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.

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

• 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.

Dana University of Pennsylvania ‘17, Course Hero Intern

• 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.

Jill Tulane University ‘16, Course Hero Intern