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Chapter 6

COMM 121 Chapter Notes - Chapter 6: Accrued Interest, Dirty Price, Clean Price

Course Code
COMM 121
Blair Robertson

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Chapter 6: How to Value Stocks and Bonds
Definition and Example of a Bond
A bond is a certificate showing that a borrower owes a specifies sum and has a agreed to
make interest and principle payments on designated dates
Example: Issue 100,000 bonds for $1,000 each, each carrying a coupon rate of 5% and a
maturity of two years, interest is paid yearly
How to Value Bonds
Pure Discount Bonds
This type of bond promises to pay a single payment at a fixed future date
The bond holder receives no money until the maturity date (no coupons)
o This type of bond is aka a zero-coupon bond for this reason
PV = 
Level-Coupon Bonds
Coupons are the stated interest on debt instruments
The holder is paid a fixed amount of money (coupon) at stated intervals and is paid back
the face value at the maturity of the bond
PV=  
  
A Note on Bond Price Quotes
Standard convention in the bond market is to quote prices “net of accrued interest”
o Means that accrued interest is deducted to arrive at the quoted price (clean price)
o The price actually paid includes accrued interest dirty price or full/invoice price
Bond Concepts
Interest Rates and Bond Prices
Level-coupon bonds trade in the following ways
o At a face value of $1000 if the coupon rate=the market interest rate
o At a discount if the market interest rate > the coupon rate
o At a premium if the market rate < the coupon rate
Bond Price = Coupon + Look at COMM 111 notes
Yield to Maturity
This is the return an investor would receive from his/her entire investment
o YTM Coupon rate
Holding-Period Return
This is the total return received from holding an asset or portfolio of assets
Holding-Period return = (Ending price beginning price)/Beginning Price
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