1 Bond Valuation Issuer (Seller) Investors (Buyers) $ $$ Bond Contract.

Slides:

Advertisements

Similar presentations

Fin351: lecture 3 Bond valuation The application of the present value concept.

Advertisements

6- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.

Interest Rates and Bond Valuation

Valuation and Characteristics of Bonds.

7-1 CHAPTER 7 Bonds and Their Valuation Key features of bonds Bond valuation(price) Measuring yield(return) Assessing risk.

Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin 3-1 Chapter Three Interest Rates and Security Valuation.

Qinglei Dai for FEUNL, 2006 Finance I Sept 28. Qinglei Dai for FEUNL, 2006 Topic covered  Bonds  Pricing of bonds  Interest rates and bond prices 

2-1 Copyright © 2006 McGraw Hill Ryerson Limited prepared by: Sujata Madan McGill University Fundamentals of Corporate Finance Third Canadian Edition.

Method 3: Pricing of Coupon Bond Pricing of coupon bond without knowing the yield to maturity.

Chapter 7. Valuation and Characteristics of Bonds.

Introduction to Bonds Description and Pricing P.V. Viswanath.

Bond Valuation Problems

©2009, The McGraw-Hill Companies, All Rights Reserved 3-1 McGraw-Hill/Irwin Chapter Three Interest Rates and Security Valuation.

Chapter 5 Bond Prices and Interest Rate Risk 1Dr. Hisham Abdelbaki - FIN Chapter 5.

Copyright 2015 by Diane S. Docking 1 Bond Valuation.

Moving Cash Flows: Review Formulas Growing Annuity Annuities are a constant cash flow over time Growing annuities are a constant growth cash flow over.

Bond Valuation John Comiskey Fred Knecht. Terms Principal – Amount of the loan on which the interest is calculated. Also called face value Coupon – Rate.

Lecture 7: Measuring interest rate

UNIT 5 QUIZ REVIEW 1. The ACME Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $50. The market interest.

4-1 Business Finance (MGT 232) Lecture Bond Valuation.

Ch. 7: Valuation and Characteristics of  2002, Prentice Hall, Inc.

Bond Valuation January 30 th 2007 Erica Berczynski Peter Huang.

Summary of Previous Lecture 1.Differentiate and understand the various terms used to express value. 2.Determine the value of bonds, preferred stocks, and.

GOALS BUSINESS MATH© Thomson/South-WesternLesson 7.5Slide 1 7.5Bond Interest Calculate bond income Calculate bond yield Calculate total cost of bonds.

The Application of the Present Value Concept

Copyright © 2012 Pearson Education Chapter 6 Interest Rates And Bond Valuation.

Chapter 10 Bond Prices and Yields Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

6-1 Lecture 6: Valuing Bonds A bond is a debt instrument issued by governments or corporations to raise money The successful investor must be able to:

Chapter 5 Fundamentals of Corporate Finance Fourth Edition Valuing Bonds Slides by Matthew Will McGraw Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies,

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  The coupon rate is the annual interest payment divided by the face value of the bond  The interest rate (or.

Fixed-income securities. Bond pricing formula P = C  { [ 1 – 1 / (1 + i) N ] / i } + FV / (1 + i) N. FV is the face (par) value of the bond. C is coupon.

CHAPTER 5 BOND PRICES AND RISKS. Copyright© 2003 John Wiley and Sons, Inc. Time Value of Money A dollar today is worth more than a dollar in the future.

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Three Interest Rates and Security Valuation.

Definition of a Bond n A bond is a security that obligates the issuer to make specified interest and principal payments to the holder on specified dates.

Long-term Debt: Bonds INTERMEDIATE ACCOUNTING II CHAPTER 14 – PART 1.

Fixed Income Basics - part 2 Finance 70520, Spring 2002 The Neeley School of Business at TCU ©Steven C. Mann, 2002 Forward interest rates spot, forward,

Principles of Investing FIN 330 CHAPTER 12 Bond Valuation Dr. David P. EchevarriaAll Rights ReservedSlide 1.

Fundamentals of Corporate Finance Chapter 6 Valuing Bonds Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity.

Business Math JOHN MALL JUNIOR/SENIOR HIGH SCHOOL.

7-1 Bonds and Their Valuation Key features of bonds Bond valuation Measuring yield Assessing risk.

1 Not To Be Naïve about Duration 1.The duration D we have been discussing also known as Macaulay duration. 2.First derivative of price-yield curve is and.

Chapter # 5 Brigham, Ehrhardt

Fundamentals of Corporate Finance Chapter 6 Valuing Bonds Topics Covered The Bond Market Interest Rates and Bond Prices Current Yield and Yield to Maturity.

How Do Bond Prices Change? Bonds are sensitive to interest rates It depends on the rate at which you issued the bond – A 1 year T-bill is paying 1.2% interest.

Bonds and Their Valuation

Exercise1: Mullineaux Co

Chapter 7 - Valuation and Characteristics of Bonds.

Interest Rates and Bond Valuation Chapter Seven. Problem Set - Bonds 1.You want to purchase a 182 day Treasury Bill with a $500,000 face value. If the.

Bond Issuer (Borrower) Trustee Bond Holder (Lender or Investor) General Public Financial Intermediary Corporation or Government Bond Certificates are exchanged.

FIXED INCOME MANAGEMENT1 MEASURING YIELD. FIXED INCOME MANAGEMENT2.

The Relationship between Bond Prices and Interest Rates As interest rates change, the value of existing bonds go either up or down. If interest rates increase,

Bonds and Their Valuation 7-1 Chapter 7. Bond Market Bond Market Size – US : $31.2 Trillion (2009) – World : $82.2 Trillion (2009) Types of Bond: Government.

Stock & Bond Valuation Professor XXXXX Course Name / Number.

Chapter 5 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin Chapter Three Interest Rates and Security Valuation.

Present Value of Bond Depends –Time to Maturity(Duration) –Yield to Maturity or Market Interest Rate: Interest rate fluctuate depending on risk –Face Value.

11. 2 chapter 42 Why shall we know the valuation of long-term securities? Make investment decisions Determine the value of the firm.

Bond Valuation Chapter 7. What is a bond? A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific.

Lecture 16 (cont’d …) Fixed Income Securities Valuation & Arbitrage Investment Analysis.

Managerial Finance Session 4a Nicole Hruban. Bond Valuation – Simple Example A Miracle Enterprises Inc’s 8 7/8 percent bond matures in 15 years. Assume.

Bond Valuation Chapter 6 Miss Faith Moono Simwami

CHAPTER 7: Bonds and Their Valuation

Securities valuation (Chapter 5&7)

Questions-Bond Valuation and Interest Rates

Bond Valuation Chapter 5 Miss Faith Moono Simwami

The Valuation of Long-Term Securities

Financial Management financial Markets.

Bond Valuation Chapter 5 Miss Faith Moono Simwami

Bond Certificates are exchanged

Presentation transcript:

1 Bond Valuation Issuer (Seller) Investors (Buyers) $ $$ Bond Contract

2 How much should you pay ?  Bond Value = ? Par C C C C C n Buy the bond today

3 Value of Bond today = C (PVIFA i, n ) + Par (PVIF i, n ) Bond Value C = Coupon Payment = coupon rate x par Par value or Face Value = $1,000 Par C C C C C n

4 An example You buy bond with $1,000 par value, Coupon rate 9% paid once per year, 5 years until maturity. Assume interest rate is 3%. What is the value of this bond? 1, Vb =+ PAR x PVIF i, n C x PVIFA i, n + 1,000 x PVIF 3%,5 90 x PVIFA 3%,5 1,274.77

5 Find value of bond with $1,000 par value, Coupon rate 15% paid once per year, 4 years until maturity Vb = C (PVIFA i,n ) + Par (PVIF i,n ) $ 1, $ 1,000 $ Bond Price = 10% = 15% = 20% If interest Bond sold at Premium Bond is sold at Par Bond sold at Discount Price-Yield relationship

6 Semiannual coupon payment Coupon per period = coupon per year ÷ 2 Find value of bond with 10% coupon rate paid semiannually, 10 years maturity. Interest rate is 6% Bond Value = C (PVIFA i/2,nx2 ) + Par (PVIF i/2,nx2 ) Coupon per period = 10% x 1,000 ÷ 2= 50 Vb = 50 ( ) + 1,000 (0.5537) Vb = 50 (PVIFA 3%, 20 ) + 1,000 (PVIF 3%, 20 ) Vb = 1,297.57

7 Finding the interest rate (YTM) = coupon per year + [(par – price) ÷ n] (par + price) ÷ 2 ***coupon per year = coupon rate x par ***par = $1,000 ***price = market price ***n = number of years

8 Finding the interest rate (YTM) = coupon per year + [(par – price) ÷ n] (par + price) ÷ 2 ***coupon per year = 10% x 1000 = $ 100 ***par = $1,000 ***price = $ 850 ***n = 5 years

9 Finding the interest rate (YTM) = $ [(1,000 – 850) ÷ 5] (1, ) ÷ 2 ***coupon per year = 10% x 1000 = $ 100 ***par = $1,000 ***price = $ 850 ***n = 5 years

10 Finding the interest rate (YTM) = $ [(1,000 – 850) ÷ 5] (1, ) ÷ 2 = $ = = %

11 Finding the interest rate (YTM) = $ [(1,000 – 1,100) ÷ 10] (1, ,100) ÷ 2 ***coupon per year = 16% x 1000 = $ 160 ***par = $1,000 ***price = $ 1,100 ***n = 10 years

12 Finding the interest rate (YTM) = $ [(1,000 – 1,100) ÷ 10] (1, ,100) ÷ 2 = $ ,050 = = %

13 Exercise 1. A corporate bond with a coupon rate of 7% matures in 4 years. Its price is currently $1, Calculate the current yield on this bond - Calculate the yield to maturity on this bond

14 Current Yield Formula The current yield refers simply to the annual payment (coupon) divided by the price. Y c = R/P where Y c is the current yield, R is the annual coupon payment in dollars, P is the market price.

15 Current Yield Example Market price of 5-years treasury bond is $1,020. the bond is paying a coupon of $50 per year. Find the current yield. Y c = Y c = or 4.9%

16 Comparing bond value & market price If the market price of Bond < Bond Value Then the Bond is “Cheap” Bond is Undervalued (Underpriced) Investors will buy the Bond Demand > Supply Price will increase

17 Comparing bond value & market price If the market price of Bond > Bond Value Then the Bond is “Expensive” Bond is Overvalued (Overpriced) Investors will sell the Bond Demand < Supply Price will decrease

18 A bond will have a higher price if: Interest rate (yield) is …………….(higher/lower) Coupon rate, payment is …………….(higher/lower) Maturity is ……….(longer/shorter)