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by: Kobe Dare

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17

INTRO TO ACTING THTR 5

Kobe Dare
UCSB
GPA 3.6

Staff

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COURSE
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Staff
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Class Notes
PAGES
17
WORDS
KARMA
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This 17 page Class Notes was uploaded by Kobe Dare on Thursday October 22, 2015. The Class Notes belongs to THTR 5 at University of California Santa Barbara taught by Staff in Fall. Since its upload, it has received 67 views. For similar materials see /class/226856/thtr-5-university-of-california-santa-barbara in Theatre at University of California Santa Barbara.

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Date Created: 10/22/15
UCSB ECON 134A Introductory Finance Lecture 5 Bond pricing Corresponds to Ch 5 in textbook Spring quarter 2009 Instructor Ragnar Arnason Definition of a Bond 0 A bond is a legally binding agreement between a borrower and a lender that specifies the Par face value the amount to be paid to the lender Maturity date the time of payment Coupon rate the annual rate of interest paid Coupon payment the amount paid on each coupon Yield to maturity The yield to maturity YTM is the IRR on all cash flows associated with the bond e the discount rate r that makes the price of the bond equal to the PV of payments received from the bond T Paymentst PTICC Zm ry t0 This r is the yield to maturity YTM Types of bonds 0 Many possible types 0 Here only consider three 1 Pure discount bonds No coupon payments par value paid at maturity 2 Level coupon bonds Coupon payments par value paid at maturity 3 Consols Coupon payments infinite maturity ie par value never paid How to Value Bonds 0 How to value any financial asset Primary Principle 0 Bond value is therefore determined by the present value ofthe coupon payments and its par value The General Bond Pricing Equation C coupon payments r rate of discount FVface value or par value Tdate of maturity Pure Discount Bonds No periodic interest payments coupon rate 0 Only one final payment par value The entire yield to maturity comes from the difference between the purchase price and the par value Cannot sell for more than par value if rgtO Treasury Bills and principalonly Treasury strips are good examples of these kinds of bonds Sometimes called zeroes deep discount bonds or original issue discount bonds OIDs Valuing Pure Discount Bonds Present value of a pure discount bond at time 0 V FVT 1r So information needed for valuing pure discount bonds Time to maturity T Maturity date today s date Face value FV Discount rate r Pure Discount Bond Example Find the value of a 30 year zero coupon bond with a 1000 par value and a YTM of 6 PV FVT 10030 1r 106 17411 Level Coupon Bonds Periodic coupon payments 0 Final payment of the par value at maturity gtThe bond is a combination of an annuity coupon payments and a terminal maturity value Coupons are often semiannual If so gt ER1S2l s is the semiannual rate Valuing Level Coupon Bonds Present value of a level coupon bond at time 0 PV g 1 l FVT r l r So information needed for valuing level coupon bonds Time to maturity T Maturity date today s date Face value FV Discount rate r Coupon value Level Coupon Bond An Example Consider a US government bond with a 6 38 coupon that expires in December 2010 The Par Value of the bond is 1000 Coupon payments are made semiannually June 30 and December31 The coupon rate 6 38 006375 per year gt Coupon payments per year 6375 and 31875 per half year Timing ofamounts 31875 31875 31875 1031875 1106 63006 123106 63010 123110 Example cont What is the value of this bond if the discount rate the potential buyers required rate of return is 5 The formula PV 9 1 1 FVT r 1 r 31375 052 Should you buy Consols 0 Famous British Government bonds Periodic coupon payments No final payment ofthe par value infinite maturity gtThe consol is a perpetuity gt The value PV of the consol is PV r Bond Pricing with a Spreadsheet Calculating bond values and yield can be arduous Many spreadsheets offer specific functions for doing this But you should work it out yourself from scratch at least for the bond value Click here for an Excel example Certain useful aspects of bonds Bond prices and market interest or discount rates r move in opposite directions When coupon rate r gtprice par value When coupon rate gt r 3 price gt par value premium bond When coupon rate lt r gt price lt par value discount bond Bond Market Reporting Primarily over the counter transactions with dealers connected electronically Extremely large number of bond issues but generally low daily volume in single issues Makes getting uptodate prices difficult particularly on a small company or municipal issues Treasury securities are an exception Check eg Bloomberg bloombergcommarkets Wall Street Journal onlinewsjcommdcpublicpagemarketsdatahtml

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