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Par value = $1,000

Coupon = 6.5% or par value per year,

or $65 per year ($32.50 every six

months).

Maturity = 22 years (matures in 2032).

Issued by AT&T.

Par value = $1,000

Coupon = 6.5% or par value per year,

or $65 per year ($32.50 every six

months).

Maturity = 28 years (matures in 2032).

Issued by AT&T.

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uebentures - unsecured bonds.

Subordinated debentures - unsecured ´juniorµ

debt.

Mortgage bonds - secured bonds.

Zeros - bonds that pay only par value at maturity;

no coupons.

Floating rate bonds ² bonds with a coupon

payment that varies over time.

Junk bonds - speculative or below-investment

grade bonds; rated BB and below. High-yield

bonds.

Convertible bonds ² securities that are

exchangeable into shares of common stock, at a

fixed price, at the option of the bondholder.

Durobonds - bonds

denominated in one currency

and sold in another country.

(Borrowing overseas.)

§ § - suppose uisney decides

to sell $1,000 bonds in France. These

are U.S. denominated bonds trading in

a foreign country. Why do this?

Durobonds - bonds

denominated in one currency

and sold in another country.

(Borrowing overseas.)

§ § - suppose uisney decides

to sell $1,000 bonds in France. These

are U.S. denominated bonds trading in

a foreign country. Why do this?

If borrowing rates are lower in France.

Durobonds - bonds

denominated in one currency

and sold in another country.

(Borrowing overseas).

§ § - suppose uisney decides

to sell $1,000 bonds in France. These

are U.S. denominated bonds trading in

a foreign country. Why do this?

If borrowing rates are lower in France.

To avoid SDC regulations.

The bond contract between the

firm and the trustee representing

the bondholders.

Lists all of the bond·s features:

coupon, par value, maturity, etc.

Lists restrictive provisions (e.g.,

callable and putable bonds)

which are designed to protect

bondholders.

uescribes repayment provisions.

Book value: value of an asset as shown

on a firm·s balance sheet; historical

cost.

Liquidation value: amount that could

be received if an asset were sold

individually.

Market value: observed value of an

asset in the marketplace; determined

by supply and demand.

Intrinsic value: economic or fair value

of an asset; the present value of the

asset·s expected future cash flows.

In general, the intrinsic value of an

asset = the present value of the

stream of expected cash flows

discounted at an appropriate

required rate of return.

differ from its market value?

m

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$

k = the investor·s required rate of return.

V = the intrinsic value of the asset.

uiscount the bond·s cash

flows at the investor·s required

rate of return.

uiscount the bond·s cash

flows at the investor·s required

rate of return.

The coupon payment stream

(an annuity).

uiscount the bond·s cash

flows at the investor·s required

rate of return.

The coupon payment stream

(an annuity).

The par value payment (a

single sum).

ü

· #

#

#

$

$

Suppose our firm decides to issue 20-

year bonds with a par value of $1,000

and annual coupon payments. The

return on other corporate bonds of

similar risk is currently 12%, so we

decide to offer a 12% coupon interest

rate.

What would be a fair price for these

bonds?

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rate, the bond will sell for par value.

Mw§w w

PV = 120 (PVIFA .12, 20 ) + 1000 (PVIF .12, 20 )

Mw§w w

PV = 120 (PVIFA .12, 20 ) + 1000 (PVIF .12, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

Mw§w w

PV = 120 (PVIFA .12, 20 ) + 1000 (PVIF .12, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

PV = 120 1 - (1.12 )20 + 1000/ (1.12) 20

= $1000

.12

Suppose interest rates fall

immediately after we issue the

bonds. The required return on

bonds of similar risk drops to

10%.

bond·s intrinsic value?

P/YR = 1

Mode = end

N = 20

I%YR = 10

PMT = 120

FV = 1000

Solve PV = -$1,170.27

P/YR = 1

Mode = end

N = 20

I%YR = 10

PMT = 120

FV = 1000

Solve PV = -$1,170.27

0

1

Mw§w w

PV = 120 (PVIFA .10, 20 ) + 1000 (PVIF .10, 20 )

Mw§w w

PV = 120 (PVIFA .10, 20 ) + 1000 (PVIF .10, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

Mw§w w

PV = 120 (PVIFA .10, 20 ) + 1000 (PVIF .10, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

PV = 120 1 - (1.10 )20 + 1000/ (1.10) 20 =

$1,170.27

.10

Suppose interest rates rise

immediately after we issue the

bonds. The required return on

bonds of similar risk rises to

14%.

bond·s intrinsic value?

P/YR = 1

Mode = end

N = 20

I%YR = 14

PMT = 120

FV = 1000

Solve PV = -$867.54

P/YR = 1

Mode = end

N = 20

I%YR = 14

PMT = 120

FV = 1000

Solve PV = -$867.54

2

1

Mw§w w

PV = 120 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

Mw§w w

PV = 120 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

Mw§w w

PV = 120 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

PV = 120 1 - (1.14 )20 + 1000/ (1.14) 20 =

$867.54

.14

P/YR = 2

Mode = end

N = 40

I%YR = 14

PMT = 60

FV = 1000

Solve PV = -$866.68

Mw§w w

PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

Mw§w w

PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

Mw§w w

PV = 60 (PVIFA .14, 20 ) + 1000 (PVIF .14, 20 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

PV = 60 1 - (1.07 )40 + 1000 / (1.07) 40 =

$866.68

.07

The expected rate of return on a

bond.

The rate of return investors earn on

a bond if they hold it to maturity.

The expected rate of return on a

bond.

The rate of return investors earn on

a bond if they hold it to maturity.

ü

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#

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$ $

Suppose we paid $898.90

for a $1,000 par 10%

coupon bond with 8 years

to maturity and semi-

annual coupon payments.

maturity?

)-3

P/YR = 2

Mode = end

N = 16

PV = -898.90

PMT = 50

FV = 1000

Solve I%YR = 12%

Mw§w w

898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 )

Mw§w w

898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

Mw§w w

898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

898.90 = 50 1 - (1 + i )16 + 1000 / (1 + i) 16

i

Mw§w w

898.90 = 50 (PVIFA k, 16 ) + 1000 (PVIF k, 16 )

1

PV = PMT 1- (1 + i)n + FV / (1 + i)n

i

1

898.90 = 50 1 - (1 + i )16 + 1000 / (1 + i) 16

i

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No coupon interest

payments.

The bond holder·s return is

determined entirely by the

price discount.

Suppose you pay $508 for a

zero coupon bond that has 10

years left to maturity.

What is your yield to maturity?

Suppose you pay $508 for a

zero coupon bond that has 10

years left to maturity.

What is your yield to maturity?

/"

P/YR = 1

Mode = Dnd

N = 10

PV = -508

FV = 1000

Solve: I%YR = 7%

%·#/" &·#

Mw§w w

PV = FV (PVIF i, n )

508 = 1000 (PVIF i, 10 )

.508 = (PVIF i, 10 ) Ë

"#$

%

&

PV = FV /(1 + i) 10

508 = 1000 /(1 + i)10

1.9685 = (1 + i)10

i = 7%

Cur Net

Yld Vol Close Chg

Polaroid 11 1/2 06 19.3 395 59 3/4 ...

P/YR = 2, N = 10, FV = 1000,

PV = $-597.50,

PMT = 57.50

Cur Net

Yld Vol Close Chg

HewlPkd zr 17 ... 20 51 1/2 +1

P/YR = 1, N = 16, FV = 1000,

PV = $-515,

PMT = 0

Solve: I/YR = 4.24%

Maturity Ask

Rate Mo/Yr Bid Asked Chg

Yld

9 Nov 18 139:14 139:20 -34

5.46

What is the yield to maturity for this

Treasury bond? (assume 35 half years)

P/YR = 2, N = 35, FV = 1000,

PMT = 45,

PV = - 1,396.25 (139.625% of par)

Solve: I/YR = 5.457%

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