Taxes bond value par value pvif inverse relationship

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(Taxes?)bond value = Par Value (PVIF)Inverse relationship between the current market interest rate (investors’ required rate of return) and bond values.When interest rates go up, bond prices fall allowing you to purchase a bond at a discountWhen interest rates go down, bond prices go up which means you are willing to pay a premium.Bond risks: Default risk - chance of losing your capital Call risk – Interest rate risk - price changes due to changing interest rates. Longer term bonds are more sensitive to changes in interest rates.Terms:Bond laddering - investing in bonds with varying maturity dates.Bond ratings- All publicly traded bonds are rated.Standard & Poor’s “AAA” bestMoody’s “Aaa” ratingsBond valuation: What would you be willing to pay for a $1000 par, 20-year maturity bond with an 8% coupon rate when the current market rate is 10%?(Interest rates are above the coupon so the price must be below par.)Bond value = $interest (PVIFA) + Par (PVIF)YearsBond value $interest (PVIFA)Par (PVIF)20$83080(8.514)1000(.149)10$87880(6.145)1000(.386)1$98280(.909)1000(.909)What if the current market rate is 6% 20$123080(11.470)1000(.312)10$114780(7.360)1000(.558)1$101880(.943)1000(.943)Calculating your return:(Approximate Yield to Maturity-which takes into account the interest received plus any capital gains or losses.)AYTM = [$interest + (par – current / years)] / [(par + 2(current)) / 3]Ex: What is your AYTM if you purchase a $1000 par value bond with a 7½% coupon rate and 10 years until maturity for $900?
What is the value of a PB that pays $85 annually when investors require a return of 9%?
Lecture 6: Stock Valuation Stock Valuation
Value of a share of CS = PV of future cash flows -> = PV dividends + PV (future price)Rights of the common stockholder:Voting - elect the board of directors (proxy) Pre-emptive right Liquidation value DividendsSome firms may have different classes of common stockA sharesB sharesPreferred stock is considered a “hybrid” security with some of the following features:Cumulative-all dividends in arrears must be paid before any common stock dividend can be paid Participating-the preferred stockholder may share in an extra or bonus dividend with the common stockholder Callable-the firm can notify the stockholder and force them to sell back the stock (retire the stock) Convertible-the preferred stockholder may convert their preferred stock into a specified number of common stock shares Terms-the dividend is usually fixed and based on parLong-term securities and Short-term securitiesLong-term securities (stocks and bonds) are traded in the Capital MarketsShort-term securities (T-bills and commercial paper) are traded in the Money MarketPrimary market the first time a security is sold IPOSecondary market the reselling of an existing security

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