BU393 Study Guide - Fall 2018, Comprehensive Midterm Notes - Interest Rate, Risk Premium, Nominal Yield
Document Summary
Bu283 review: bonds, portfolio theory and the capm. If ytm > coupon, bond is selling at a discount: price is below face value, coupons not enough to cover required return on bonds. If ytm < coupon, bond is selling at a premium, price exceeds face value. Interest more than compensates for riskiness of bond so bond is worth more than face value: examples: bond 1 has a coupon rate of 10% and 15 years to maturity. Bond 2 has a coupon rate of 8% and 25 years to maturity. Face value of unless otherwise stated: bond 1 is selling at a premium because the coupon rate is higher than the. If there is a 3rd bond, trading at par, the coupon rate is 9% making the. Ytm = to the coupon: the(cid:396)e is a (cid:271)o(cid:374)d p(cid:396)i(cid:272)i(cid:374)g fo(cid:396)(cid:373)ula (cid:271)ut bu(cid:1007)9(cid:1007) does(cid:374)"t fo(cid:272)us o(cid:374) that, more on the ytm, cost of debt.
