Chapter 11: Valuation and Characteristics of Bonds
When are (interest) payments paid?
(interest) payments are paid at fixed intervals (usually every 6 months)
What is the YTM?
-The expected rate of return on a bond. -The rate of return investors earn on a bond if they hold it to maturity.
Whats does the Coupon =
Coupon Rate x Par Value
What does the Annual Actual Return break down into?
Current Yield + Capital Gains Yield -I/P0 + (P1 - P0)/P0 = (P1 - P0 + I)/P0
What do bond indentures describe?
Describes repayment provisions.
What do you do to the number of years, required return and annual coupon if the bond has Semiannual Coupons?
Double the number of years, and divide required return and annual coupon by 2.
What does a bond indenture list?
Lists all of the bond's features: -coupon, par value, maturity, etc.
What kind of contract is a bond indenture?
The bond contract between the firm and the trustee representing the bondholders.
What amount doe the liquidation value show?
amount that could be received if an asset were sold individually.
Why do bond indentures list restrictive provisions?
designed to protect bondholders.
How is the marker value of an asset determined?
determined by supply and demand.
What is the intrinsic value also known as?
economic or fair value of an asset
What is the market value of an asset?
observed value of an asset in the marketplace
What do Bonds pay?
pay fixed coupon
What value do they pay?
pay the par value at maturity.
What is the Par Value of a bond?
stated face value that is the amount the issuer must repay.
What will the bond sell for if the coupon rate = discount rate?
the bond will sell for its par value
What will the bond sell for if the coupon rate < discount rate?
the bond will sell for less than the par value: a discount
What will the bond sell for if the coupon rate > discount rate?
the bond will sell for more than the par value: a premium
What is the intrinsic value of an asset?
the present value of the asset's expected future cash flows.
What does the intrinsic value generally equal?
the present value of the stream of expected cash flows discounted at an appropriate required rate of return
What does the Yield to Maturity (YTM) =
the rate of return the bond would earn if purchased at today's price and held until maturity
What is the Book Value of an asset?
value of an asset as shown on a firm's balance sheet; historical cost.
In the marketplace, what do we know/not know about a bond?
we know a bond's current price(PV), but not its return.
What is the Maturity Date
when the par value is repaid.
