Principles of Finance : Concept of Bonds
Principles of Finance : Concept of Bonds FIN 323
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This 3 page Class Notes was uploaded by Winn on Friday February 19, 2016. The Class Notes belongs to FIN 323 at Marshall University taught by in Spring 2016. Since its upload, it has received 24 views. For similar materials see Principles of Finance in Business at Marshall University.
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Date Created: 02/19/16
Chapter 6 : ( part 1 ) Interest rates and Bond valuation I ) Bond : a) What is bond? (debt contract and interest-only loan) _ It is a debt investment that an investor loans money to an entity ( corporate or governmental ) which borrows the funds for a defined period of time at a variable or fixed interest rate. _ Bonds are used by companies, municipalities, states and sovereign government to raise money and finance a variety of projects and activities _ Owners of bonds are debtholders or creditors, of the issuer. With : Municipality : usually an urban administrative division having corporate status and powers of self- government or jurisdiction. b) What is Par value ( face value ) ? (face amount, re-paid at maturity and assume $1000 or $ 100 for corporate bonds ) _Par value for a share refers to the stock value stated in the corporate charter. _Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. _ Par value for a bond is typically $1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per share. _ The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status. _ In the case of equity, par value has very little relation to the shares' market price. ( Picture : Bond concepts ) c) What is coupon interest rate ? (stated interest rate, usually = YTM ( yield to maturity at issue ) , multiply by par value to get coupon payment ) _A coupon rate is the yield paid by a fixed income security. A fixed income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. The coupon rate is the yield the bond paid on its issue date This yield, however, will change as the value of the bond changes, thus giving the bond's yield to maturity c) What is maturity? (years until bond must be repaid) the period of time for which a financial instrument remains outstanding most commonly used in the context of fixed income investments, such as bonds and deposits d) What is 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 With APR is: * the amount of interest on your total loan amount that you'll pay annually (averaged over the full term of the loan). * A lower APR translates to lower monthly payments.