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BOND VALUATION

BOND VALUATION. BONDS ARE DEBT OBLIGATIONS OF CORPORATIONS, AND FEDERAL, STATE, AND LOCAL GOVERNMENTS. FACE VALUE = AMOUNT THAT WILL BE PAID AT MATURITY. MOST BONDS HAVE A FACE VALUE OF $1,000 COUPON RATE = THE RATE AT WHICH INTEREST IS PAID .

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BOND VALUATION

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  1. BOND VALUATION • BONDS ARE DEBT OBLIGATIONS OF CORPORATIONS, AND FEDERAL, STATE, AND LOCAL GOVERNMENTS. • FACE VALUE = AMOUNT THAT WILL BE PAID AT MATURITY. MOST BONDS HAVE A FACE VALUE OF $1,000 • COUPON RATE = THE RATE AT WHICH INTEREST IS PAID

  2. MATURITY DATE - THE DATE WHEN THE BOND WILL PAY THE FACE VALUE • YIELD TO MATURITY - THE ANNUAL PERCENT RETURN THE BOND WILL GIVE THE INVESTOR WHEN HELD TO MATURITY. TAKES INTO ACCOUNT THE INTEREST PAID AND ANY CAPITAL GAIN OR LOSS.

  3. PROBLEM: A 5% BOND THAT MATURES IN 6 YEARS AND PAYS SEMI-ANNUAL INTEREST. WHAT IS THE VALUE OF THE BOND IF IT IS PRICED TO YIELD 6%? PMT =(1000*.05)/2 = $25 P/Y = 2 N = 6 YEARS * 2 = 12 I/Y = 6.0 % FV = $1,000 PV = ?

  4. ZERO COUPON BONDS • BONDS WHERE THE COUPON RATE IS ZERO. • THE SAME BOND IN THE PREVIOUS PROBLEM WITH A ZERO COUPON. PMT = 0 P/Y = 2 N = 6 YEARS * 2 = 12 I/Y = 6.0 % FV = $1,000 PV = ?

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