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CHAPTER 6

CHAPTER 6. Interest Rates & Bond Valuation. What are we going to learn in this chapter ?. Bond Basics. What are bonds ? Why issue them ? Who issues bonds ? How does the process work ? Etiler Gıda=> 1,000 TL; 10 years ; 12 %. Bond Terminology. Face Value (or Par Value): Coupon:

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CHAPTER 6

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  1. CHAPTER 6 Interest Rates & Bond Valuation

  2. Whatarewegoingtolearn in thischapter?

  3. Bond Basics • Whatarebonds? Whyissuethem? • Whoissuesbonds? • Howdoestheprocesswork? • Etiler Gıda=> 1,000 TL; 10 years; 12 %

  4. Bond Terminology • Face Value (or Par Value): • Coupon: • Coupon Rate: • Maturity: • Price: (Is the price in the previous example 1,000 TL?)

  5. Bond Values and Yield • As time passes, interest rates change in the marketplace. Whathappenstothecashflows of thebondandtheprice of thebond? • When interest rates rise, thebond is worththesame? worthmore? worthless? Why? • Yield to maturity (YTM)

  6. Bond Valuation • Suppose Pegasus were to issue a bond with 10 years to maturity. The bond has an annual coupon of TL 80. Similar bonds have a yield to maturity of 8 percent. What would this bond sell for?

  7. Bond Valuation • To illustrate what happens as interest rates change, suppose a year has gone by. The Pegasus bond now has nine years to maturity. If the interest rate in the market has risen to 10 percent, what will the bond be worth? • Discount bond

  8. Bond Valuation • What would the Pegasus bond sell for if interest rates had dropped by 2 percent instead of rising by 2 percent? In this case, again, there are nine years remaining. • Premium bond

  9. Bond Valuation • Bond Value = PV of coupons + PV of face value

  10. Semiannual Coupons • If a bond has a coupon rate of 14 percent, but it payssemiannually. The yield to maturity is quoted at 16 percent. Maturity is 7 years. What should be the price?

  11. Interest Rate Risk • What is interest rate risk? • Time tomaturity • Coupon rate

  12. Interest Rate Risk

  13. Yield to Maturity • Suppose we are interested in a six-year, 8 percent coupon bond. A broker quotes a price of TL 955.14. What is the yield on this bond? (face value assumed to be 1,000 TL)

  14. Yield to Maturity • A bond has a quoted price of $1,080.42. It has a face value of $1,000, a semiannual coupon of $30, and a maturity of five years. What is its yield to maturity?

  15. Debt vs. Equity • Ownership & votingpower • Taxdeductability • Liability & bankruptcy

  16. Inflation vs. Interest Rates • Nominal rates are called “nominal” because they have not been adjusted for inflation. Real rates are rates that have been adjusted for inflation. • An investment is available that will be worth $115.50 in one year. It costs $100 today. What is theinterest rate? • What is theinflation is 5 %?

  17. Inflation vs. Interest Rates • The Fisher Effect defines….. • (1 + R) = (1 + r)(1 + h)

  18. Inflation vs. Interest Rates • If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the exact nominal rate?

  19. END OF CHAPTER

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