Bond valuation o Important Terms n Types of Bonds a Valuation of Bonds n Handling semiannual Compounding 4-6
4-6 Bond Valuation Important Terms Types of Bonds Valuation of Bonds Handling Semiannual Compounding
Important Bond Terms n a bond is a long-term debt instrument issued by a corporation or government n The maturity value(MV)Tor face value] of a bond is the stated value. In the case of a u.s. bond the face value is usually $1,000 4-7
4-7 Important Bond Terms The maturity value (MV) [or face value] of a bond is the stated value. In the case of a U.S. bond, the face value is usually $1,000. A bond is a long-term debt instrument issued by a corporation or government
Important Bond Terms o The bond's coupon rate is the stated rate of interest: the annual interest payment divided by the bonds face value n The discount rate(capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk 4-8
4-8 Important Bond Terms The discount rate (capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk. The bond’s coupon rate is the stated rate of interest; the annual interest payment divided by the bond’s face value
Different Types of Bonds A perpetual bond is a bond that never matures. t has an infinite life (1+k)1 (1+k)2+…+ (1+k)o ∑ (1+k or (PVIFA K 1 ka [Reduced Formi 4-9
4-9 Different Types of Bonds A perpetual bond is a bond that never matures. It has an infinite life. (1 + kd ) 1 (1 + kd ) 2 (1 + kd ) V = + + ... + I I I = t=1 (1 + kd ) t I or I (PVIFA kd , ) = I / kd [Reduced Form]
Perpetual Bond EXample Bond P has a $1,000 face value and provides an 8%coupon. The appropriate discount rate is 10%. What is the value of the perpetual bond? 1=$1,000(8%)=$80 d=10% V =l/kd [Reduced Form =$80/10%〓$800 4-10
4-10 Perpetual Bond Example Bond P has a $1,000 face value and provides an 8% coupon. The appropriate discount rate is 10%. What is the value of the perpetual bond? I = $1,000 ( 8%) = $80. kd = 10%. V = I / kd [Reduced Form] = $80 / 10% = $800