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regular interest payments that borrower pays
level coupon bond
constant coupon paid every year.
Face value/Par value
Amount that will be repaid/principal paid at maturity
annual coupon divided by face value (120/1000=.12)
stated interest on bond
# of years until face value repaid
As interest rates increase, the present values_____
declines (worth less/interest rates increase bond prices decrease)
When interest rates fall, the bond is worth______
Yield or Yield to maturity (YTM)
rate required in the market
Bond value =
- PV of coupons + PV of par value
- PV of annuity +PV of lump sum
Consider a bond with a coupon rate
of 10% and annual coupons. The par value is $1,000 and the bond has 5 years to
maturity. The yield to maturity is 11%. What is the value of the bond?
N =5; I/Y = 11; PMT = 100; FV = 1,000
CPT PV = -963.04
bond sells for less than face value
§Suppose you are looking at a bond
that has a 10% annual coupon and a face value of $1000. There are 20 years to
maturity and the yield to maturity is 8%. What is the price of this bond?
N =20; I/Y = 8; PMT = 100; FV = 1000
1.If YTM = coupon rate, then par
1.If YTM > coupon rate, then par
value > ______
If YTM < coupon rate, then par value <______
the Coupon rate = 14% with semiannual coupons; YTM = 16%; Maturity = 7 years; Par value = $1,000
What is the bond worth now?
1.How many coupon payments are there?
2.What is the semiannual coupon
3.What is the semiannual yield?
- PMT = 70; N = 14; I/Y = 8; FV =
- 1,000; CPT PV = -917.56