Corporate Finance page 8

# Risk free interest rate with maturity n is ytmn two

• Notes
• 2

This preview shows 1 out of 2 pages.

Risk-free interest rate with Maturity n is YTMn - Two types of coupon bonds are Treasury notes and treasury bonds. - Yield to maturity for a bond is the IRR of investing in the bond and holding it to maturity. It is the single discount rate that equates the present value of the bond’s remaining cash flows to its current price - P = CPN X 1/y X (1 – 1/(1+y)^n) + FV/(1+y)^n

Subscribe to view the full document.

- Coupons can trade at a discount, a premium, or at par Premium = Coupon rate > YTM, Par = Coupon rate = YTM, Discount = Coupon Rate < YTM - Example: Face value of a 25-yr bond is 100 with YTM of .05 and you purchase it for 23.14. Your IRR of your investment will be (100/1.05^25 / 23.14) - 1 = 5% - When a bond is trading at a premium, the price drop when a coupon is paid will be larger than the price increase between the coupons so the bond’s premium will tend to decline as time passes. - A higher YTM implies a higher discount rate for a bond’s remaining cash flows, reducing their present value and hence the bond’s price. Therefore, as interest rates and bond yields rise, bond prices will fall and vice versa - Bonds with higher durations are highly sensitive to interest rate changes - Bond prices converge to the bond’s face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields
You've reached the end of this preview.
• Spring '10
• Kaminsky
• incremental irr

{[ 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