FINC311 Lecture Notes - Lecture 6: Premium Bond, Unsecured Debt, Sign Convention

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redwalrus66

25 Jun 2016

School

University of Delaware

Department

Finance

Course

FINC311

Professor

John Stocker

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Document Summary

Know important bond features and bond types. Understand: bond values and why they fluctuate, bond ratings and what they mean, the impact of inflation on interest rates, the term structure of interest rates and the determinants of bond yields. Par value (face value: assume on corporate bonds, repaid at maturity. Coupon rate: stated interest rate, usually equals ytm at issue, multiply by par value to get coupon payment. Maturity date: years until bond must be repaid. Yield to maturity: the market required rate of return for bonds of similar risk and maturity, the discount rate used to value a bond, return if bond is held to maturity, usually equals coupon rate at issue. Bond value = pv(annuity) + pv(lump sum) As interest rates increase, present value decreases. As interest rates increase, bond prices decrease. Coupon rate = ytm: price = par. Coupon rate is less than ytm: discount bond . Coupon rate is greater than ytm: premium bond .

Related Questions

Please answer questions 7 to 11 with work, thank you!

7) Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?

8) The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?

9) What is the inflation rate if nominal return is 14% and real return is 10%?

10) Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?

11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

orchidfrog938

Question 5: (15 points).

(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity on a comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions with two answer options (e.g. increase/decrease) choose the best answer and write it in the answer block. Question Answer

a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent? $

b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent? $

c. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent? $

d. The change in the value of a bond caused by changing interest rates is called interest-rate risk.

Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease): By contrast in interest rates will cause the value to (increase/decrease): Also, based on the answers in part b, if the yield to maturity (current interest rate) equals the coupon interest rate, the bond will sell at (par/face value): exceeds the bond's coupon rate, the bond will sell at a (discount/premium): and is less than the bond's coupon rate, the bond will sell at a (discount/premium): e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? $ f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent? $ g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond.

BONDS AND THEIR VALUATION

(I need help explaining the following and/or demonstrating it for my upcoming exam if anyone could help me comprehend the concepts I would greatly appreciate it!!)

Interpret and apply all bond terminology (i.e. par, maturity, coupon, price, yield, etc.)..

Explain the relationship between a bondâs price and its maturity..

Explain the relationship between a bondâs price and its yield..

Explain the relationship between prevailing interest rates and bond yields..

Explain and interpret bond credit ratings..

Explain the different types of bonds (i.e. treasuries, municipal bonds, CDOâs, indexed bonds, etc.)..

Calculate the tax equivalent yield for a municipal bond..

Interpret and explain bond spreads (price or yield) and how they change..

FINC311 Lecture Notes - Lecture 6: Premium Bond, Unsecured Debt, Sign Convention

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