33:390:310 Lecture Notes - Lecture 7: Interest Rate Risk, Xanth, Interest Rate
Document Summary
If interest rates change overtime, the cashflow from the bond still stays the same: because of this, the value of the bond will change. Interest rate increases, present value of the bonds remaining cash flow decreases. If given the price of the bond, you cannot solve for the rate, must use trial and error: current yield: a (cid:271)o(cid:374)d"s a(cid:374)(cid:374)ual (cid:272)oupo(cid:374)/pri(cid:272)e. 7. 2 more about bond features: debt is not a form of ownership interest. Creditors have no voting power: a (cid:272)orporatio(cid:374)"s pa(cid:455)(cid:373)e(cid:374)t of i(cid:374)terest is a (cid:272)ost of doi(cid:374)g (cid:271)usi(cid:374)ess a(cid:374)d is ta(cid:454) dedu(cid:272)ti(cid:271)le. Di(cid:448)ide(cid:374)ds are not: u(cid:374)paid de(cid:271)t is a lia(cid:271)ilit(cid:455). Creditors (cid:272)a(cid:374) (cid:272)lai(cid:373) the fir(cid:373)"s assets if it is (cid:374)ot paid. Can lead to liquidation or reorganization, then bankruptcy. Is it debt or equity: some corporations make complex securities with similar features of equiies, but are treated like debt, equity represents ownership interest, and is a residual claim, equity holders are paid after debt holders.
