Pricing Bonds to annuties due

# Pricing Bonds to annuties due - YTM< CR = price>...

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Pricing Bonds Bonds – long term IOU’s, usually interest-only loans -Interest is paid by borrower every period with the principal repaid at the end of loan Coupons - regular interest payments (fixed amount = level coupon) Face value or Par value – principal, amount repaid at end of loan Coupon rate – coupon quotes as a % of face value Maturity – time until face value is paid, usually given in years, can change over the life of the bond Coupon = coupon rate x par value - The cash flows from a bond are the coupons and the face value. The value of a bond (market price) is the present value of the expected cash flow discounted at market rate of interest. Yield to maturity – rate required in te market on a bond that makes the discounted cash flows from a bond equal to the bonds market price. Coupon rates are not the same at YTM. Ex. C = [(1-1/(1+r)^t)/r] + par/(1+r)^t Since coupon rate and YTM are the same, price should equal face value. YTM> CR = price < par (discount)

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Unformatted text preview: YTM< CR = price > par (premium) YTM = CR price = par (par) Discounted Cash Flows Evaluation Valuing level cash flows: Annuity and Perpetuities Ordinary annuity – multiple, identical cash flows occurring at the end of each period for a fixed number of periods Annuity PV = C[(1-(1/(1+r)^t)/ r] Ex. Periodic interest rates: r = APR/N APR= Annual Percentage Rate, N= number of periods Ex. - Trial and Error requires you to choose a discount rate, find the PV, and compare to the actual PV and compare to the actual PV.- If the compounded PV is too high, then choose a higher discount rate and repeat process. If compounded PV is too low then choose a lower discount rate and repeat. Ex. Future values of Annuities: FV = C[(1+r)^t – 1]/ r Ex. Note on Annuities Due:- annuity due – 1 st payment occurs at the beginning of the period instead of at the end.- Annuity due value – ordinary annuity due value times (1+r)...
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Pricing Bonds to annuties due - YTM< CR = price>...

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