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Unformatted text preview: Chapter 10: Bond Prices and Yields 10.1 BOND CHARACTERISTICS A bond is a security that is issued in connection with a borrowing arrangement- The borrower sells the bond- The lender buys the bond A typical coupon bond obligates the issuer to make semiannual payments of interest called coupon payments to the bondholder for the life of the bond When the bond matures, the issuer repays the debt by paying the bonds par value (face value) The coupon rate of the bond determines the interest payment- Annual payment = Coupon rate X Par value The bond indenture, the contract between the issuer and the bondholder, contains the coupon rate, maturity date, and bonds par value Zero coupon bond: a bond paying no coupons, that sells at a discount, and provides only a payment of par value at maturity Treasury Bonds & Notes Treasury notes are issued with original maturities between 1 and 10 years Treasury bonds are issue with maturities ranging from 10 to 30 years Both are purchased in denominations of $100 or $1000 and make semiannual coupon payments The bid and asks prices are quoted in points plus fraction of 1/32 of a point (the number after the colons) Accrued Interest & Quoted Bond Prices The quoted prices of bonds on financial pages doesnt include the interest that accrues between coupon payment dates If a bond is purchased between coupon payments, the buyer must pay the seller for accrued interest, the prorated share of the upcoming semiannual coupon- Accrued Interest Equation (p. 289) The sale, or invoice price of the bond is the amount the buyer actually pays- Invoice Price = Quoted Price + Accrued Interest Corporate Bonds Like the government, corporations borrow money by issuing bonds Most bonds are traded over the counter The rating column is the estimation of bond safety given by the 3 major bond rating agencies (Moodys, Standard & Poors, and Fitch)- Bond with A ratings are safer than those rated B- Safer bonds with the high ratings promise lower yield to maturity Registered v. Bearer Bonds- U.S. bonds are registered, most bonds in the rest of the world are bearer bonds.- With bearer bonds you must clip off the coupon and mail it in to get your interest as you are not a registered owner, although a broker can do this for you. - With registered bonds the issuer and the issuers trustee knows you are the owner and you will receive your interest and principal payments automatically. Registration helps the IRS ensure that interest income is declared. Callable bonds: bonds that may be repurchased by the issuer at a specified call price...
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This note was uploaded on 03/09/2012 for the course FINANCE 4828 taught by Professor Blohmeyer during the Spring '12 term at LSU.
- Spring '12