Chapter 6 - Interest rates and bond valuation. Chapter 6 introduces you to the world of interest rates and bonds. Though bonds are considered to be among the safest investments available, they are not without risk. The primary risk that bond investors face is the risk that market interest rates will fluctuate. Those fluctuations cause bond prices to move, and those movements affect the returns that bond investors earn. Chapter 6 explains why interest rates vary from one bond to another and the factors that cause interest rates to move. | Chapter 6 Interest Rates And Bond Valuation Learning Goals Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Review the legal aspects of bond financing and bond cost. Discuss the general features, quotations, ratings, popular types, and international issues of corporate bonds. Understand the key inputs and basic model used in the valuation process. Learning Goals (cont.) Apply the basic valuation model to bonds and describe the impact of required return and time to maturity on bond values. Explain the yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually. Interest Rates & Required Returns The interest rate or required return represents the price of money. Interest rates act as a regulating device that controls the flow of money between suppliers and demanders of funds. The Board of Governors of the Federal Reserve System regularly asses economic conditions and, when necessary, . | Chapter 6 Interest Rates And Bond Valuation Learning Goals Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Review the legal aspects of bond financing and bond cost. Discuss the general features, quotations, ratings, popular types, and international issues of corporate bonds. Understand the key inputs and basic model used in the valuation process. Learning Goals (cont.) Apply the basic valuation model to bonds and describe the impact of required return and time to maturity on bond values. Explain the yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually. Interest Rates & Required Returns The interest rate or required return represents the price of money. Interest rates act as a regulating device that controls the flow of money between suppliers and demanders of funds. The Board of Governors of the Federal Reserve System regularly asses economic conditions and, when necessary, initiate actions to change interest rates to control inflation and economic growth. Interest Rates & Required Returns: Interest Rate Fundamentals Interest rates represent the compensation that a demander of funds must pay a supplier. When funds are lent, the cost of borrowing is the interest rate. When funds are raised by issuing stocks or bonds, the cost the company must pay is called the required return, which reflects the suppliers expected level of return. Interest Rates & Required Returns: The Real Rate of Interest The real interest rate is the rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world. In this context, a perfect world is one in which there is no inflation, where suppliers and demanders have no liquidity preference, and where all outcomes are certain. The supply-demand relationship that determines the real rate is shown in Figure on the following slide. Interest Rates & Required Returns: The Real Rate of .
