Payment what is the semiannual yield b 701 110814

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Unformatted text preview: erm bonds have more price risk than short-term bonds Low coupon rate bonds have more price risk than high coupon Low rate bonds rate Reinvestment Rate Risk Uncertainty concerning rates at which cash flows can be Uncertainty reinvested reinvested Short-term bonds have more reinvestment rate risk than longterm bonds High coupon rate bonds have more reinvestment rate risk than High low coupon rate bonds low 12 Figure 7.2 13 Computing Yield-to-maturity Yield-to-maturity is the rate implied by the Yield-to-maturity current bond price current Finding the YTM requires trial and error if you do Finding not have a financial calculator and is similar to the process for finding r with an annuity the If you have a financial calculator, enter N, PV, If PMT, and FV, remembering the sign convention (PMT and FV need to have the same sign, PV the opposite sign) the 14 YTM with Annual Coupons Consider a bond with a 10% annual coupon rate, Consider 15 years to maturity and a par value of $1,000. The current price is $928.09. The Will the yield be more or less than 10%? N = 15; PV = -928.09; FV = 1,000; PMT = 100 CPT I/Y = 11% 15 YTM with Semiannual Coupons Suppose a bond with a 10% coupon rate and Suppose semiannual coupons, has a face value of $1,000, 20 years to maturity and is selling for $1,197.93. $1,197.93. Is the YTM more or less than 10%? What is the semiannual coupon payment? How many periods are there? N = 40; PV = -1,197.93; PMT = 50; FV = 1,000; CPT 40; I/Y = 4% (Is this the YTM?) I/Y YTM = 4%*2 = 8% 16 Table 7.1 17 Current Yield vs. Yield to Maturity Current Yield = annual coupon / price Yield to maturity = current yield + capital gains yield Example: 10% coupon bond, with semiannual coupons, Example: face value of 1,000, 20 years to maturity, $1,197.93 price face Current yield = 100 / 1,197.93 = .0835 = 8.35% Price in one year, assuming no change in YTM = 1,193.68 Capital gain yield = (1,193.68 – 1,197.93) / 1,197.93 = -.0035 = Capital -.35% -.35% YTM = 8.35 - .35 = 8%, which the same YTM computed earlier 18 Bond Pricing Theorems Bonds of similar risk (and maturity) will be priced Bonds to yield about the same return, regardless of the coupon rate coupon If you know the price of one bond, you can If estimate its YTM and use that to find the price of the second bond the This is a useful concept that can be transferred This to valuing assets other than bonds to 19 Bond Prices with a Spreadsheet There is a specific formula for finding bond There prices on a spreadsheet prices PRICE(Settlement,Maturity,Rate,Yld,Redemption, PRICE(Settlement,Maturity,Rate,Yld,Redemption, Frequency,Basis) Frequency,Basis) YIELD(Settlement,Maturity,Rate,Pr,Redemption, YIELD(Settlement,Maturity,Rate,Pr,Redemption, Frequency,Basis) 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 20 Differences Between Debt and Differences Equity Equity Debt Not an ownership interest Creditors do not have Creditors voting rights voting Interest is considered a Interest cost of doing business and is tax deductible and Creditors have legal Creditors recourse if interest or princip...
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