finance_mngmt_chap7

finance_mngmt_chap7 - Example : Bond- $1,000, 30 years, 12%...

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Financial Management Exam #2 Chapter 7: Interest Rates and Bond Valuation When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generally called bonds. Bond Features and Prices Coupons are the regular interest payments Face value or par value is the amount to be repaid at the end of the loan Coupon rate is the coupon divided by the face value of the bond Maturity is the number of years until the face value is paid
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Unformatted text preview: Example : Bond- $1,000, 30 years, 12% interest rate o Coupon = .12 x 1,000 = $120 o Face value = $1,000 o Coupon rate = $120 / $1000 = 12% o Maturity = 30 years Bond Values and Yields Interest rates change. The cash flows, however, stay the same. As a result, the value of the bond will fluctuate. Higher interest rate = PV of remaining cash flows declines, and the bond is worth less. Lower interest rate = PV of remaining cash flows rises, and the bond is worth more....
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This note was uploaded on 04/06/2012 for the course FIN 300 taught by Professor Longo during the Fall '10 term at Rutgers.

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