Wondershare EdrawMind
Bonds and Their Valuation
302
1
3
Study Smarter
This is a mind map that contains information about the bonds and their valuation.
Tags:
Similar Mind Maps
Outline
Bonds and Their Valuation
WHAT IS BOND?
A longterm debt instrument in which aborrower agrees to make payments ofprincipal and interest, on specific dates, tothe holders of the bond.
BOND YIELDS
Yield to Maturity
the rate of return earned on a bond if it is heldto maturity
Yield to Call
the rate of return earned on a bond when it iscalled before its maturity date.
-->Sells at Premium
In general, if a bond sells at a premium, then
1) coupon --> rd
2) a call is more likely
--> Sells at Discount
Expected to Earned
YTC on premium bond
YTM on par and discount bonds
BOND VALUATION
(Par Bond)
rd = coupon rate, fixedrate bond sells at par
(Discount Bond)
rd --> coupon rate, fixedrate bond sells belowpar
(Premium Bond)
rd > coupon rate, fixedrate bond sells abovepar
CHANGES IN BOND VALUES OVER TIME
At maturity, the value of any bond must equalits par value.
current yield (CY)= Annual Coupon Payment / Current Payment
Capital Gains Yield(CGY) = Change in Price / Beginning Price
Expected Total Return = YTM = (Expected CY) + ( Expected CGY)
BOND FEATURES
Par Value the facevalue of abond
Coupon Interest Rate the specifiednumber of dollars ofinterest paid eachyear
Maturity Date a specified dateon which the parvalue of a bondmust be repaid.
Issue date – when the bond was issued.
Yield to maturity (YTM) rate of return earnedon a bond held until maturity (also called the“promised yield”).
Yield to call (YTC) rate of return earned on abond when it is called before its maturity date.
Call Provision a provision in a bond contractthat gives the issuer a right o redeem thebonds under specified terms prior to thenormal maturity date.
SEMI-ANNUAL BOND
STEPS :)
1) Multiply years by 2 : number of periods = 2n.
2) Divide nominal rate by 2 : periodic rate (I/YR) = rd / 2.
3) Divide annual coupon by 2 : PMT = ann cpn / 2.
Annual VS Semiannual
(Semiannual effective rate) --> (the annualbond’s effective rate)
so you would preferthe semiannual bond.
