Chapter7 InterestRatesandBondValuation*ChapterOutlineBondsandBondValuationBondFeaturesBondRatingsSomeDifferentTypesofBondsBondMarketsInflationandInterestRatesDeterminantsofBondYields7-**MarketValues($Trillion)Valueofoutstandingissues*BondsandBondValuationAbondisalegallybindingagreementbetweenaborrowerandalenderthatspecifiesthe:Par(face)(facevalue)CouponrateCouponpaymentMaturitydateYieldorYieldtomaturity(requiredreturn,marketrate)7-**TheBond-PricingEquationNoticethat:Thefirsttermisthepresentvalueofthecouponpayments(anannuity);and,Thesecondtermisthepresentvalueofthebond’sparvalueBond=PresentValueofCashFlowsBondValue=PVofcoupons+PVofparBondValue=PVofannuity+PVoflumpsumAsinterestratesincrease,presentvaluesdecreaseSo,asinterestratesincrease,bondpricesdecreaseandviceversa7-**ValuingaDiscountBondwithAnnualCouponsConsiderabondwithacouponrateof10%$1,000,%.Whatisthevalueofthebond?Usingtheformula:B=PVofannuity+PVoflumpsumB=100[1–1/()5]/.11+1,000/()5B=+=:N=5;I/Y=11;PMT=100;FV=1,000CPTPV=--**ValuingaPremiumBondwithAnnualCouponsSupposeyouarereviewingabondthathasa10%annualcouponandafacevalueof$,andtheyieldtomaturityis8%.Whatisthepriceofthisbond?Usingtheformula:B=PVofannuity+PVoflumpsumB=100[1–1/()20]/.08+1000/()20B=+=:N=20;I/Y=8;PMT=100;FV=1000CPTPV=-1,-**GraphicalRelationshipBetweenPriceandYield-to-maturity(YTM)BondPriceYield-to-maturity(YTM)7-**
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