Textbook Notes (367,752)
Canada (161,368)
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FIN 501 (31)
Chapter 11

CFIN501- Chapter 11- Bond Prices and Yields.docx

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FIN 501
Edward Blinder

CFIN501 Chapter 11 Bond Prices and YieldsBond BasicsBondsecurity that offers the investor a series of fixed interest payments during its life long with a fixed payment of principal when it maturesLong as the bond issuer does not defaultschedule of payments does not changeBonds issued with maturities of less than 10 years notesVery small number of bonds issues have no stated maturities perpetuities or consolsStraight BondsStraight bondsIOU that obligates the issuer to pay the bondholder a fixed sum of money at bonds maturity along with constant periodic interest payments during the life of the bondFixed sun paid at maturityreferred to as bond principal par value stated value or face valuePeriodic interested payments couponsEX Canadian bonds issued by the federal government to finance the national debt business corporations and municipal governments also routinely issue debt in the form of straight bondsAdditional special features sometimes designed to enhance a bonds appeal to investorsoConvertible bondsconversion features that grants bondholders the right to convert their bonds into shares of common stock of the issuing corporationoRetractable bondsgrants bondholders the right to sell their bonds back to the issuer at a special put priceWhen a bond is issued with one or more special featureit is no longer a straight bondBonds with attached special features will normally have a straight bond componentperiod coupon payments and fixed principal payment at maturityoImportant as the basic unit of bond analysisPays a series of consent semiannual coupons along with a face value of 1000 payable at maturityCoupon Rate and Current YieldCoupon ratebonds annual coupon divided by its pay valueoCoupon yield or nominal yieldannualcouponCouponrateparvalueCurrent yieldbonds annual coupon divided by its market priceannualcouponcurrentyieldbondpriceChange in bond pricecoupon rate remains constantBonds current yield is inversely related to its pricechanges whenever the bonds price changesStraight Bond Prices And Yield To MaturityYield to maturity YTMdiscount rate that equates a bonds price with the present value of its future cash flowsoPromised yield or just yieldStraight Bond PricesC1FVBondPrice12M2MYTMYTMYTM1122Coupon used is the annual couponsum of the two semiannual couponsSTRIPSyield on a bond is an annual percentage rate APRcalculated as twice the true semiannual yieldoYield on a bond somewhat understates its effective annual rate EARTwo componentsoPresent value of all coupon payments coupons are fixed and paid on a regular basisoPresent value of the principal payment at maturitystandard calculation for the present value of a single lump sumPremium and Discount BondsDistinguished according to whether they are selling at par value or at a discount or premium relative to par valueRelative price descriptionsoPremium bondsbonds with a price greater than par valueYield to maturity is less than its coupon rate1
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