Management and Organizational Studies 2310A/B Lecture Notes - Lecture 11: Accrued Interest, Interest Rate Risk, Sign Convention
4 Feb 2016
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Chapter 7 interest rates and bond valuation. Value of financial securities = pv of expected future cash. To value bonds and stocks we need to: Discount future cash flows at an appropriate rate: The rate should be appropriate to the risk presented by the security. Borrowing arrangement obligating the issuer to make specified payments to the bondholder on specified dates. Issuer (debtor/borrower) sells a bond to an investor (creditor/lender) for cash. The bond usually pays semi-annually: each period the investor will receive coupon rate of. Maturity date (t) the issuer must return the money to the investor which is coupon payment + face value (fv) interest. Consider a government of canada bond listed as 5. 000. December 2014: the par value of the bond is ,000, coupon payments are made semi-annually (june 30 and, since the coupon rate is 5. 000 the payment is . 000. Characteristics: face value (or par value, or principle) The amount on which issuer pays coupon.
