FIN 3610 Corporate Finance

Corporate bond issued by corporations municipal bonds

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Corporate Bond – issued by corporations. Municipal Bonds – issued by state and local governments. Foreign Bonds – issued by either foreign governments or foreign corporations. Bonds Characteristics Par Value – the face value of the bond. Coupon – the specified number of dollars of interest paid each period. Coupon Rate – the annual coupon divided by the face value of a bond. Maturity – the date on which the principal amount of a bond is paid. Yield to Maturity – the rate of return earned on a bond if it is held to maturity. Current Yield – annual coupon payments divided by bond price. Alternative Types of Bonds Floating Rate Bond – a bond whose interest rate fluctuates with shifts in the general level of interest rates. Zero Coupon Bond – a bond that pays no annual interest but is sold at a discount below par.
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Lecture 7 – Interest Rates and Bond Valuation Class notes Convertible Bond – A bond that is exchangeable, at the option of the holder, for common stock of the issuing firm. Income Bond – A bond that pays interest only if the interest is earned. Indexed Bond – A bond that has interest payments based on an inflation index so as to protect the holder from inflation. Bond Features Call Provisions – gives the issuing corporation the right to call the bonds for redemption ¤ Call Premium – the additional sum the company must pay the bondholders to call the bonds. ¤ Deferred Call – Bonds are often not callable until several years after they were issued. ¤ Refunding Operation – issuing lower-yielding securities and using the proceeds to retire a previous higher-rate issue. Sinking Funds – a provision in a bond contract that requires the issuer to retire a portion of the bond issue each year. ¤ The company can call in for redemption a certain percentage of the bonds each year. ¤ The company may buy the required number of bonds on the open market. Bond Valuation Bond Valuation – the value of any financial asset is simply the present value of the cash flows the asset is expected to produce. Changing Bond Values Over Time – The value (price) of bonds drop when interest rates rise and vice-versa. ¤ Par bond – Whenever the going rate of interest is equal to the coupon rate, a fixed rate bond will sell at its par value. ¤ Discount bond – Whenever interest rates rise above the coupon rate, a fixed-rate bond’s price will fall below its par value.
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Lecture 7 – Interest Rates and Bond Valuation Class notes ¤ Premium bond – Whenever interest rates fall below the coupon rate, a fixed-rate bond’s price will rise above its par value. ¤ The market value of a bond will always approach its par value as its maturity date approaches.
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