Bonds

1. Bonds • Money comes from 3 sources: • 1. Debt • 2. Common Stock • 3. Preferred Stock

2. Bonds • DEBT - low risk IOU, pay back • principal + interest • Allied COMMON - own a piece of the • Food STOCK Allied Food Corp. • PREFERRED - certificates entitled • STOCK to share profit of • the company

3. Bonds • Bond: (coupon rate=100/1000 = 10%) • 100 :interest or coupon • 1,000 :par value = FV • (face value), • 1,000 1 year = n always 1,000 • Bond = 1 year to maturity • Value (life of the bond)

4. Bonds Bond Price Calculation: INPUTS 1 10% -100 1000 N I/YR PV PMT FV 1000 OUTPUT

5. Bonds • Bond Price Calculation Example: • Bond was bought 5 years ago. • 1000 = FV • PMT 100 100 100 100 100 • 1 2 3 4 5 • 1991 1992 1993 1994 1995 • 1000 = PV n = 5

6. Yield to Maturity • 100 1,000 • Yield to Maturity • = 12% = Kd • n = 1 • PV = ?

7. Bonds Bond Price Calculation: INPUTS 1 12% -100 1000 N I/YR PV PMT FV 982 OUTPUT

8. Bonds • ROI Bond Price • 10% $1,000 • 12% $982 • 8% $1,018 • Interest rate Bond price • Interest rate Bond price

9. Bonds • When Yield to Maturity = Kd = ROI = 10% = Coupon Rate, • Then Bond price = par value = 1,000. • In real estate : refinance, • in bond : call provision.

10. Bonds • Example: • 100 100 100 1,000 • 1 2 3 • Bond value YTM = ROI = 9% • Bond price • PV = ? • = 1,025.3

11. Bonds Bond Price Calculation: INPUTS 3 9% 100 1000 N I/YR PV PMT FV 1,025.3 OUTPUT

12. Bonds • If require ROI = 12% = Kps • DPS = 10 • VPS= DPs= 10 = 83.3 • kps 0.12