Finance School of management Chapter 8. Valuation of Known Cash flows. Bonds Objective Explain the principles of bond pricing Understand the features that affect bond prices uesTc
1 Finance School of Management Objective Explain the principles of bond pricing Understand the features that affect bond prices Chapter 8. Valuation of Known Cash Flows: Bonds
Finance School of management Chapter 8 Contents Using Present Value Formulas to Value Known Flows The Basic building blocks: Pure Discount bonds Coupon Bonds, Current Yield, and Yield-To-Maturity Reading bond listings Why Yields for the Same Maturity Differ The behavior of bond prices over time uesTc
2 Finance School of Management Chapter 8 Contents ❖ Using Present Value Formulas to Value Known Flows ❖ The Basic Building Blocks: Pure Discount Bonds ❖ Coupon Bonds, Current Yield, and Yield-To-Maturity ❖ Reading Bond Listings ❖ Why Yields for the Same Maturity Differ ❖ The Behavior of Bond Prices over Time
Finance School of management Valuation and fixed-Income securities Essence of valuation process Valuation models Fixed-income securities and other contracts promising a stream of known future cash payments Bond Mortgages Pension annuities uesTc
3 Finance School of Management Valuation and Fixed-Income Securities ❖ Essence of valuation process ❖ Valuation models ❖ Fixed-income securities and other contracts promising a stream of known future cash payments – Bonds – Mortgages – Pension annuities
Finance School of management Reasons for Valuing Fixed-Income Securities To have an agreed-upon valuation procedure in setting the terms of the contracts at the outset To revaluate the securities when they are sold before maturity uesTc
4 Finance School of Management Reasons for Valuing Fixed-Income Securities ❖ To have an agreed-upon valuation procedure in setting the terms of the contracts at the outset. ❖ To revaluate the securities when they are sold before maturity
Finance School of management Using Present Value Formulas to value Known Cash flows a fixed-income security that PV= PM1-(1+i) promises to pay $100 each year for the next three years The appropriate n PV FV PMT Result discount rate is 6% 36%?0100PV=267.30 per year An hour after you PV FV PMT Result buy the security the 37%?0100PV=262.43 risk-free interest rate rises from 6% to 7%o ber year uesTc
5 Finance School of Management Using Present Value Formulas to Value Known Cash Flows ❖ A fixed-income security that promises to pay $100 each year for the next three years. ❖ The appropriate discount rate is 6% per year. ❖ An hour after you buy the security, the risk-free interest rate rises from 6% to 7% per year. i PMT i PV −n − + = 1 (1 ) n i PV FV PMT Result 3 6% ? 0 100 PV=267.30 n i PV FV PMT Result 3 7% ? 0 100 PV=262.43