# This formula can only be applied when the frequency

• Test Prep
• 78

This preview shows page 43 - 46 out of 78 pages.

This formula can only be applied when the frequency of the annuity payments is the same as thecompounding period for the interest rate. For example, if the annuity has quarterly payments theinterest rate must be compounded quarterly (m = 4). As with the earlier formula, the Future Valueis computed at the end of the period in which the last annuity payment occurs.Thus, the earlier Future Value on an Annuity formula is actually just a special case of thisformula since under annual compounding (i.e.,when m = 1) the rate per period is the same as thenominal rate.Future Value of an Annuity ExampleFind the Future Value at the end of 3 years of an annuity of \$100 per quarter for 3 years if theinterest rate is 8% compounded quarterly.
Bond ValuationBonds are long-term debt securities that are issued by corporations and governmententities. Purchasers of bonds receive periodic interest payments, called couponpayments, until maturity at which time they receive the face value of the bond and thelast coupon payment. Most bonds pay interest semiannually. TheBondIndentureorLoan Contractspecifies the features of the bond issue. The followingterms are used to describe bonds.Par or Face ValueThe par or face value of a bond is the amount of money that is paid tothe bondholders at maturity. For most bonds the amount is \$1000. It alsogenerally represents the amount of money borrowed by the bond issuer.Coupon RateThe coupon rate, which is generally fixed, determines the periodiccoupon or interest payments. It is expressed as a percentage of the bond'sface value. It also represents the interest cost of the bond issue to theissuer.Coupon PaymentsThe coupon payments represent the periodic interest payments from thebond issuer to the bondholder. The annual coupon payment is calculatedbe multiplying the coupon rate by the bond's face value. Since mostbonds pay interest semiannually, generally one half of the annual couponis paid to the bondholders every six months.Maturity DateThe maturity date represents the date on which the bond matures,i.e.,thedate on which the face value is repaid. The last coupon payment is alsopaid on the maturity date.Original MaturityThe time remaining until the maturity date when the bond was issued.Remaining MaturityThe time currently remaining until the maturity date.44
Call DateFor bonds which are callable,i.e.,bonds which can be redeemed by theissuer prior to maturity, the call date represents the date at which thebond can be called.Call PriceThe amount of money the issuer has to pay to call a callable bond. Whena bond first becomes callable,i.e.,on the call date, the call price is oftenset to equal the face value plus one year's interest.Required ReturnThe rate of return that investors currently require on a bond.

Course Hero member to access this document

Course Hero member to access this document

End of preview. Want to read all 78 pages?