BUSFIN 4223 - Bond Valuation
Variation in 3 steps - ANS-1) Figure out cash flow
2) Figure out interest rate used to discount cash flow
3) Calc PV of each cash flow and add them up
US government - ANS-Has never defaulted on payment but not entirely impossible
Let C be the cash received in t years, and let rN the annual n-times compounded interest rate
for this time horizon, i.e. t years. Then the present value of C : - ANS-PV (C ) = C × 1(1 + rn/n
)n×t
For continuously compounded, - ANS-PV (C ) = C × 1/(e^rcc) ×t
Bond Value - ANS-Bond Value = PV(coupons) + PV(par/face value)
Bond Value = PV(annuity) + PV(lump sum)
Annuity Factor Formula - ANS-=1/r[1 - 1/(1+r)^t
rcc - ANS-ln[(1+r2/2)^2]
Flat Term Structure - ANS-PV(c) = c x 1/(1+ rn,t/n)^n x t
PV(c) = c x 1/(e^rcc,t x t)
YTM - ANS-internal rate of return
expected return if you buy the bond today and wait till maturity
higher yield, expect higher return = bond is risky
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