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Bond Value (Bond (Terms (Maturity (The number of years until the face…
Bond Value
Bond
Bond Price ( May or may not be same as face value)
Terms
Maturity
The number of years until the face value has to be paid
Coupons
This is the installment payment amounts
Face/Par Value
The end sum of money due
Coupon Rate
Annual Coupon/ Face value
Example
Terminology
Example
Beck Corps wants to borrow $1000
They agree to paying 12% of it annually and they'll pay the whole $1000 after 30 years
$1000 is the face value
30 years is the maturity
$120 is the coupon
12% is the coupon rate
Flow
Issuer is whoever makes the bond proposal
Someone who likes the terms pays the face value for the bond
They in return get the coupon payments and when the maturity date comes they also get the Face Value back
Correlations to stock
A company issues stock for money for some piece of the company
Once someone agrees to pay for it the transaction is done
If the value of the company goes up then it was a good investment by the person who bought the stock
Calculating Value
Bond Value( at a particular time) depends on
# of periods remaining until maturity
face value
coupon
market interest rate for similar bonds
Total bond value = Face Value at initial time :question:
Calculating Present Value of Bond
Imagine a bond is sold with the following qualities:
Coupon Rate = 8%
Maturity = 10 years
Face Value = $1000
Present Value = \(\frac{\text{Actual Value}}{(1 + r)^{\text{Periods}}}\)
Equations
Total Bond Value = Present Value + Annutity Value
Present Value = \(\frac{\text{Actual Value}}{(1 + r)^{\text{Periods}}}\)
Annuity Value = Coupon * \(\frac{1 - (1 + r)^\text {Periods}}{r}\)
General
Present Value at start = Face Value
Government Bonds
2 main differences compared to regular bonds
No default risk
Treasury branch can always just print more money
Their issues are exempt from State taxes
Only taxed at federal level
Treasury
State and local governments ( Municipal issues)
Traits
Has varying degrees of default risk
Exempt from federal income taxes( not necessarily State income taxes)
Makes them attractive to high income tax bracket
Results in much lower yields
Yield
Fluctuation
There's actually fluctuation to the value of the stock
This is primarily because interest rates change
If someone initiates a bond at %10 but then the averate rate increases to 12% due to poor timing the person who gave out the bond lost out of getting more money
bond value \(\propto\) interest rate
Relationships
Present Value \(\propto \frac{1}{\text{years until maturity}}\)
Annuity Present Value \(\propto\) Interest Rate
Interest Rate Risk
Depends on
Time to maturity
risk \(\propto \) maturity time
Long term bonds make most their profit off the coupons
Short term bonds are more insensitive since the face value is so quickly recieved
Coupon rate
risk \(\propto \) 1 / coupon rate
Increases at a decreasing rate
A 10 year bond has a much greater risk than a 1 year bond but a 30 year bond only has a slightly greater risk than the 10 year bond
Final Review Video
Bond Question
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Misc
Relations
When rates are expected to go down people prefer long term bonds
This is because you're locking in the bond at a better value
Calculations
Equations
Current yield = \(\text{Coupon rate} \over{\text{Current price of the Bond}}\)
Total Bond Value= Present value+ Annuity Present Value
Corporate Bonds
Traits
Can default
Default
What happens to the bond if the issuer runs into issues ie bankruptcy
Companies take this into account with expected value
Expected Value
Promised Value
If there is no default risk
Bond Ratings
Rates the credibility and trustworthiness of the issuer
The ratings only have to do with the default risk
Doesn't take interest rate risk into consideration
Equations
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