Chapter 10: Bonds Valuation Flashcards
The formula of valuation of bonds
Price = PV (coupons) + PV (principal/par value)
The bond’s value now or in period zero
Price
The coupon payment
C
The bond’s principal payment
Par
the rate of return required by investors on this quality or risk class of bonds given its bond rating.
rB
Bond’s intrinsic value
Bond’s price
Pay coupon interests once a year/annually
a. Eurobonds
b. American bonds
a. Eurobonds
Pay coupon interests twice a year/semi-annually
a. Eurobonds
b. American bonds
b. American bonds
The r reflects the combination of the real risk-free rate and expected inflation as measured by the nominal risk-free interest rate.
No default risk
The r represents a nominal risk-free rate plus a premium to reflect ________ risk.
Default risk.
Stated annual rate or the required rate of return (rb) commonly called the market rate
Annual Percentage Rate (APR)
Face value of a security
Par Value
Par Value = $1,000
Coupon rate = 8%
n = 10 years
m =2
What is annual coupon payment?
> $1,000 x 0.08
= $80 / year
Par Value = $1,000
Coupon rate = 8%
n = 10 years
m =2
What is semi- annual coupon payment?
> $80 / 2 = $40
Estimated return on a bond if held to maturity.
Yield to maturity
Formula of AYM
AYM = Annual Interest + [(par value - price) / yrs to maturity] / (Par value + Price) / 2
Par value = $1,000
Price = $875.48
Bond life = 10 years
Annual Coupon = $80
Find the AYM
= 9.86%
True or False
The larger the coupon interest, the higher the bond’s price.
True
par value = $1,000
n = 10 years
m =2
Coupon rate = 10%
Find PV (Coupons)
In notebook
par value = $1,000
n = 10 years
m =2
Coupon rate = 10%
Find PV (Par value)
Found in notebook
par value = $1,000
n = 10 years
m =2
Coupon rate = 10%
Find Bond Value Prices
Found in notebook
A bond selling par value
discount bond
a bond selling in excess of its par value
Premium bond
True or False
The bond’s price reflect changes in market conditions while it remains outstanding.
True
True or False
The higher the yield to maturity or rb, the lower the price of the bond.
True
True or False
The lower the yield to maturity for rb, the lower the price of the bond
False
(The lower the yield to maturity for rb, the higher the price of the bond)
actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investments
Political risk
