Bond valuation Discount the bonds cash flows at the investors required rate of return the coupon payment stream(an annuity). the par value payment (a single sum)
Bond Valuation • Discount the bond’s cash flows at the investor’s required rate of return. – the coupon payment stream (an annuity). – the par value payment (a single sum)
Bond valuation 1=∑ SM (1+k)(1+k t=1 Vb=SI (PVIFA kb, n)+ SM (PVIF kb, n)
Bond Valuation Vb = $It (PVIFA kb , n) + $M (PVIF kb , n) $It $M (1 + kb ) t (1 + kb ) Vb = + n n t = 1 S
Bond example Suppose our firm decides to issue 20-year bonds with a par value of$1, 000 and annual coupon payments. The return on other corporate bonds of similar risk is currently 12%o, so we decide to offer a 12% coupon interest rate. What would be a fair price for these bonds?
Bond Example • Suppose our firm decides to issue 20-year bonds with a par value of $1,000 and annual coupon payments. The return on other corporate bonds of similar risk is currently 12%, so we decide to offer a 12% coupon interest rate. • What would be a fair price for these bonds?