1、,Chapter 4,Principles of Corporate FinanceNinth Edition,Valuing Bonds,Topics Covered,Bonds Using The Present Value Formula to Value Bonds How Bond Prices Vary With Interest Rates The Term Structure and YTM,Bonds,A bond is a security that pays a stated amount of interest to the investor, then at matu
2、rity, it repurchased by the issuing company.simply a long-term loan.,Bonds (the indenture),A bond is a legally binding agreement between a borrower and a lender that specifies the: Par (face) value -principal Coupon rate Coupon payment Maturity Date The yield to maturity is the required market inter
3、est rate on the bond.,Bonds,Face value is the stated value of an asset. In the case of a bond, the face value is usually $1000 The face value is supposed to be paid back to the bondholders as the principal, no matter what the purchasing price of the bond Coupon：annual interest payment Coupon rate: t
4、he stated rate of interest on a bond; or the annual interest payment divided by bonds face value,Treasury Bond issued by the federal government. Corporate Bond issued by corporations. Municipal Bonds issued by state and local governments. Foreign Bonds issued by either foreign governments or foreign
5、 corporations.,7-7,Government Bonds,U.S. Government Bonds Treasury bills pure discount bonds with original maturity of one year or less T-notes coupon debt with original maturity between one and ten years T-bonds coupon debt with original maturity greater than ten years,Zero-coupon bonds,is a bond b
6、ought at a price lower than its face value, with the face value repaid at the time of maturity. (pure discount bonds) A bond that does not make coupon payments. The only cash payment the investor receives is the face value of the bond on maturity date. Eg: Treasury bills,Zero-coupon bonds,-$96,618.3
7、6,Year,0 1,$100,000,Suppose that a one-year, risk-free, zero coupon bond with a 100,000 face value has an initial price of $96,618.36,no interest!,The yield to maturity,Yield to Maturity the rate of return earned on a bond if it is held to maturity According to the definition, the yield to maturity
8、of one year zero coupon bond solves the following : 96,618.336=100,000/1+YTMYTM=3.5%,Pure Discount Bonds: Example,Find the value of a 30-year zero-coupon bond with a $1,000 par value and a YTM of 6%.,Equation,Equation Yield to Maturity of an n-Year Zero-Coupon Bond,Example Yields for Different Matur
9、ities,Example 8.1 Yields for Different Maturities,Equation Risk-Free Interest Rate with Maturity n,Graphical Relationship Between Price and Yield-to-maturity (YTM),Bond Price,Yield-to-maturity (YTM),7-17,Valuing a Bond,Coupon bonds,Like zero-coupon bonds, coupons bonds pay investors their face value
10、 at maturity. In addition, these bonds make regular coupon interest payments.,Valuing a Bond,Example If today is October 1, 2007, what is the value of the following bond? An IBM Bond pays $115 every September 30 for 5 years. In September 2012 it pays an additional $1000 and retires the bond. The bon
11、d is rated AAA (WSJ AAA YTM is 7.5%)Cash Flows Sept 08 09 10 11 12 115 115 115 115 1115,Valuing a Bond,Example continued If today is October 1, 2007, what is the value of the following bond? An IBM Bond pays $115 every September 30 for 5 years. In September 2012 it pays an additional $1000 and retir
12、es the bond. The bond is rated AAA (WSJ AAA YTM is 7.5%),Valuing a Bond,Example - Germany In July 2006 you purchase 100 Euros of bonds in Germany which pay a 5% coupon every year. If the bond matures in 2012 and the YTM is 3.8%, what is the value of the bond?,Valuing a Bond,Another Example - Japan I
13、n July 2006 you purchase 200 Yen of bonds in Japan which pay a 8% coupon every year. If the bond matures in 2011 and the YTM is 4.5%, what is the value of the bond?,Valuing a Bond,Example - USA In July 2006 you purchase a 3 year US Government bond. The bond has an annual coupon rate of 4%, paid semi
14、-annually. If investors demand a 2.48% return on 6 month investments, what is the price of the bond?,Valuing a Bond,Example continued - USA Take the same 3 year US Government bond. The bond has an annual coupon rate of 4%, paid semi-annually. If investors demand a 1.50% return on 6 month investments
15、, what is the new price of the bond?,Yield to Maturity of a Coupon Bond,Example 8.3 Computing the Yield to Maturity of a Coupon Bond,Yield to Maturity of a Coupon Bond,Bond Prices Immediately After a Coupon Payment,Example 8.5 Determining the Discount of Premium of a Coupon Bond,Determining the Discount of Premium of a Coupon Bond,
