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Lecture note Essentials of corporate finance – Chater 6: Interest rates, bill and bond valuation

In this chapter, you will learn: Know the important bond features and bond types, understand bond values and why they fluctuate, understand bond ratings and what they mean, understand the impact of inflation on interest rates, understand the term structure of interest rates and the determinants of bond yields. | 6- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 6- Key Concepts and Skills Know the important bond features and bond types Understand: Bond values and why they fluctuate Bond ratings and what they mean The impact of inflation on interest rates The term structure of interest rates and the determinants of bond yields 6. 6- Chapter Outline 6.1 Bonds and Bond Valuation 6.2 More on Bond Features 6.3 Bond Ratings 6.4 Some Different Types of Bonds 6.5 Bond Markets 6.6 Inflation and Interest Rates 6.7 Determinants of Bond Yields 6. 6- Bond Definitions Bond Debt contract Interest-only loan Par value (face value) ~ $1,000 Coupon rate Coupon payment Maturity date Yield to maturity 6. 6- Key Features of a Bond Par value: Face amount Re-paid at maturity Assume $1,000 for corporate bonds Coupon interest rate: Stated interest rate Usually = YTM at issue Multiply by par value to get coupon payment 6. 6- Key Features | 6- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 6- Key Concepts and Skills Know the important bond features and bond types Understand: Bond values and why they fluctuate Bond ratings and what they mean The impact of inflation on interest rates The term structure of interest rates and the determinants of bond yields 6. 6- Chapter Outline 6.1 Bonds and Bond Valuation 6.2 More on Bond Features 6.3 Bond Ratings 6.4 Some Different Types of Bonds 6.5 Bond Markets 6.6 Inflation and Interest Rates 6.7 Determinants of Bond Yields 6. 6- Bond Definitions Bond Debt contract Interest-only loan Par value (face value) ~ $1,000 Coupon rate Coupon payment Maturity date Yield to maturity 6. 6- Key Features of a Bond Par value: Face amount Re-paid at maturity Assume $1,000 for corporate bonds Coupon interest rate: Stated interest rate Usually = YTM at issue Multiply by par value to get coupon payment 6. 6- Key Features of a Bond Maturity: Years until bond must be repaid Yield to maturity (YTM): The market required rate of return for bonds of similar risk and maturity The discount rate used to value a bond Return if bond held to maturity Usually = coupon rate at issue Quoted as an APR 6. 6- Bond Value Bond Value = PV(coupons) + PV(par) Bond Value = PV(annuity) + PV(lump sum) Remember: As interest rates increase present values decrease ( r → PV ) As interest rates increase, bond prices decrease and vice versa 6. 6- The Bond-Pricing Equation PV(Annuity) PV(lump sum) C = Coupon payment; F = Face value Return to Quiz 6. 6- Texas Instruments BA-II Plus , = number of periods to maturity - = period interest rate = YTM . = present value = bond value / = coupon payment 0 = future value = face value = par value n , - . / 0 6. 6- Spreadsheet Formulas =FV(Rate,Nper,Pmt,PV,0/1) =PV(Rate,Nper,Pmt,FV,0/1) =RATE(Nper,Pmt,PV,FV,0/1) =NPER(Rate,Pmt,PV,FV,0/1) .