Bond Valuation

Question 1

Par Value Bond

Answer 1

A bond that sells for exactly the Face Value

Question 2

Face Value

Answer 2

The Principal Amount of the Bond

Question 3

Annual Coupon

Answer 3

The stated interest payment on the bond

Coupon rate x Face value

Question 4

Coupon Rate

Answer 4

The annnual coupon divided by the face value

Expressed as a percentage

Question 5

Maturity

Answer 5

The specified date on which the principal amount of a bond is paid

expressed in years

Question 6

Present Value of a Bond

Answer 6

Face Value/ 1 + Coupon Rate ^Maturity

Question 7

Present Value of Annuity

Answer 7

1. Find 1- (1/ 1+ CR^M)
2. Divide by Coupon rate
3. Multiply by Coupon

Question 8

The Fisher Effect

Answer 8

Describes the relationship between nominal returns, real returns, and inflation: Nominal rate is approximately equal to real rate plus inflation rate

Question 9

Discount Bond

Answer 9

A bond that sells for less than the face value

Question 10

Premium Bond

Answer 10

A bond that sells for mor than the face value

Question 11

Value of a Bond

Answer 11

C x [1- (1+r)^t]/r + F/(1+r)^t

F is Face Value
C is Coupon
t is periods to maturity
r is Yield per period

Question 12

Solving Bond Prices and Yields using Financial Calculator

Answer 12

N = Years to Maturity
PV = Bond Value
FV = Face Value
PMT = Coupon
I/Y = Yield to Maturity

Question 13

Finding the Yield to Maturity

Answer 13

Trial and Error:
1. Consider the type of bond ( < , >, =)
2. Test values close in number

Question 14

Current Yield

Answer 14

Annual Coupon Payment / Current market value (purchase price)