Mind Map Gallery Bonds and Their Valuation
This is a mind map that contains information about the bonds and their valuation.Edited at 2020-10-12 06:17:58
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.
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
rd = coupon rate, fixedrate bond sells at par
rd --> coupon rate, fixedrate bond sells belowpar
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)
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.
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.