FIN 3901 Lecture 6: Chapter 6- Bond Valuation

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26 Dec 2016
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Interest only loan: par value (face value) ~1,000. Coupon rate * fv = pmt: coupon payment, maturity date. Years until bond must be repaid: yield to maturity (ytm) aka r. Market required rate of return for bonds of similar risk and maturity. Discount rate used to value a bond. Quoted as apr (annual percentage rate: ** make sure everything is in the same time i. e periods or years. As interest rates increase present values decrease ( r pv ) As interest rates increase, bond prices decrease and vice versa. Annuity due = 1 (payment at beginning of period) The ytm (11%) is higher than the coupon rate (10%), which makes sure the pv (price) will be under ,000 (fv). Ytm < coupon rate then price > face value. Ytm > coupon rate then price < face value. Ytm = coupon rate then price = face value. Change in price due to changes in interest rates.

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