Summary
Summary Chapter 6: valuing bonds
- Course
- Institution
This summary is of chapter 6: valuing bonds
[Show more]
Seller
Follow
kiarademoor
Reviews received
Content preview
Chapter 6: Valuing bonds1. The bond market
B ONDS
= Debt instrument
= Financing by borrowing money
Bond
Security that obligates the issuer to make specified payments to the bondholder
Face value (par value or principal value)
Payment at the maturity of the bond
Coupon
The interest payments made to the bondholder
Coupon rate
Annual interest payment as a percentage of face value
BONDS AT INCEPTION /CREATION
5-year bond example
Coupon of 2% every year
At inception, most bonds typically sell for their face value, but this depends on the coupon and yield
the maturity (see further)
, 2. Interest rates and bond prices
WARNING
The coupon rate IS NOT the discount rate used in the Present Value calculations.
The coupon rate merely tells us what cash flow the bond will produce > Since
the coupon rate is listed as a %, this misconception is quite common
The discount rate is the rate at which cash flows can be invested > Therefore in
the context of bonds, we use a required rate of return as discount rate
The theoretical price of a bond is the present value of all cash flows generated by the bond (i.e. coupons
and face value) discounted at the required rate of return
Cpn is commonly used as an abbreviation for coupon
Bond prices are quoted as a percentage of par Par value x price % = $ Price
Cash flows to an investor in the 1.25%
coupon bond maturing in 2018
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller kiarademoor. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R112,07. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
79223 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now