Principles of Finance · free preview
Bond Valuation
A bond's price is the present value of its coupons plus the present value of its face value, discounting at the yield to maturity, so prices fall when yields rise, and the coupon-yield comparison decides whether a bond sells at a premium, at par, or at a discount.
1. The valuation equation
The valuation equation
2. Premium, par, and discount
Premium, par, and discount
3. Price and yield move in opposite directions
Price and yield move in opposite directions
4. Yield to maturity as the decision rate
Yield to maturity as the decision rate
5. The two present value pieces
Which two pieces sum to a coupon bond's price?
6. Pricing the three-year bond
A bond pays 60 dollars annually for three years and 1,000 dollars at maturity, with a 5 percent yield. What does it sell for?
7. The premium rule
Why does a bond with a 6 percent coupon sell at a premium when the market yield is 5 percent?
8. Par pricing condition
Under what condition does a bond sell exactly at its face value?
9. Why rising rates hurt bond prices
Why do existing bond prices fall when market interest rates rise?
10. Which bond swings more
Two bonds share the same yield and credit, one maturing in three years, the other in thirty. If yields rise one percent, which falls more in price?
11. The discount rate's name
What three-word term names the single discount rate that equates a bond's promised payments to its market price? Answer in lowercase.
12. The above-face condition's name
What one-word term names a bond's price position above its face value when its coupon exceeds the yield? Answer in lowercase.
13. The pull to par
What one-word term names a bond's position below face value when its coupon trails the yield? Answer in lowercase.
14. The maturity repayment
What two-word term names the face value repayment that a bond makes at maturity, ending the contract? Answer in lowercase.
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