The price of a premium bond falls over time the price

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the price of a premium bond falls over timethe price of par bond stays constant over timethe price of a discount bond rises over time
Chapter 6: Bond Yield3 methods of measuring return an investor would receive on bond investment:Current yieldYield to Maturity (YTM or yield)Rate of ReturnCurrent yield = annual coupon payment / bond priceYield To Maturity: discount rate for which the present value of the bond’s payments equal the priceRate of Return = (Income + Capital gain or loss) / Initial PriceIncome includes coupons received + gains from reinvestment of those coupons
Chapter 6: Interest Rate Risk & Yield CurveAll else equal, a longer maturity bond has higher interest rate riskAll else equal, a lower coupon bond has higher interest rate riskThe principal measure of interest risk of a bond is called its durationThe yield curve, at any point in time, plots the yield to maturity of otherwise identical bonds that differ only in their time to maturitySince longer maturity bonds have higher interest rate risk, all else equal, investors would require a higher rate of return on longer maturity bonds, or else they would not be willing to hold these bonds
Chapter 6: Managing RiskA bond issuer faces the risk that interest rates may fall, but he is locked into paying a fixed couponOne option is to make the bond callable, the issuer reserves the right to retire the bond before maturity at a pre- specified call priceAll else equal, a callable bond should trade at a lower price than an otherwise identical non-callable bondSimilarly, to protect investors, bonds may be puttable the buyer/holder reserves the right to demand repayment before maturityAll else equal, a puttable bond should trade at a higher price than an otherwise identical non-puttable bondMost government bonds and many corporate bonds are callableFloating rate bonds: coupon rate = reference benchmark + spread
Chapter 6: Credit Risk & Default RiskCorporate bonds yield = similar government bonds yield + SpreadPrimarily due to: Default riskLook at ratings to determine the proper yield (risks), if available
Chapter 6: Valuing Bonds QuestionA 9.00 percent coupon bond with 18 years left to maturity is priced to offer a 7.5 percent yield to maturity. Assume semi-annual interest payments and $1,000 pay value.a)Calculate the current bond priceb)In one year, the yield to maturity will be 6.05 percent. If this occurs, what would the new bond price be? What would be the total return of the bond if you sell it at the new price in one year?c)Assume this bond has a call feature and could be called in 9 years. If the bond is called, investors will earn 6%. The call premium is one year worth of coupon payments. What is the current price of the callable bond?
Chapter 7:Valuing Stocks
Chapter 7: BasicsA common stock is an ownership share in a corporationLike bonds, shares are periodically issued and publicly tradedUnlike bonds, there are no pre-specified promised stream of income for a stock and no maturity date

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